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Why Salesforce layoffs may actually be a problem for the stock

In the wake of Salesforce's (CRM) mass layoff announcement last week, Wall Street may have overlooked one key element in its haste to predict better profit margins from the tech giant.

According to Bernstein analyst Mark Moerdler, who published a critical client note on Salesforce Wednesday, mass firings may actually hinder sales growth and, as a result, profit margins.

"Salesforce recently announced a ~10% employee reduction, in addition to comments on other cuts, which will only drive additional deceleration in growth," Moerdler warned. "On the other hand, margin improvements take time to take effect and are likely going to be much less than the street expects."

The analyst slashed his rating to Underperform from Market Perform in a 38-page report.

Chairman and Co-CEO of Salesforce Marc Benioff attends a session at the 50th World Economic Forum (WEF) annual meeting in Davos, Switzerland, January 21, 2020. REUTERS/Denis Balibouse
Chairman and Co-CEO of Salesforce Marc Benioff attends a session at the 50th World Economic Forum (WEF) annual meeting in Davos, Switzerland, January 21, 2020. REUTERS/Denis Balibouse

Salesforce's layoffs will see some 7,000 people get pink slips, along with the company executing select real estate exits and office space reductions.

"I’ve been thinking a lot about how we came to this moment," Benioff said in a letter to employees. "As our revenue accelerated through the pandemic, we hired too many people leading into this economic downturn we’re now facing, and I take responsibility for that."

The company estimates it will incur $1.4 billion to $2.1 billion in charges related to the actions.

Salesforce stock — which fell about 44% in 2022 — has mostly trended higher since the cost-cutting plan was unveiled on January 4. Shares fell more than 1% during Wednesday afternoon trading.

The moves come as Salesforce is getting pushed by Wall Street to bolster margins following a string of high-profile deals with companies such as Slack, Tableau, and Mulesoft.

Salesforce has committed to a 25% operating margin by calendar year 2025. If hit, it would mark a notable increase from 2022's goal of 20.4%.

Moerdler said he sees more "pain" ahead for Salesforce despite the new cost savings and suggested investors act accordingly.

"The core of our thesis is that growth has been decelerating for years, but the deceleration has been masked by acquisitions," Moerdler added. "With the tailwinds from M&A no longer enough, core markets approaching cloud saturation, competition increasing, and macro issues hitting growth, management is aggressively pivoting to driving margins. But the cuts are going to negatively impact efficiency, growth, and customer/employee satisfaction. Margin improvement will be less than expected in our view, and will appear over multiple years. Meanwhile, CRM falls into growth purgatory."

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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