Salesforce Spent a Record $27.1 Billion on Buybacks in One Quarter. Here Is Why That Signal Matters.
Key Points
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Salesforce has been aggressively buying back its stock, spending $27.1 billion on repurchases in Q1 alone.
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The company continued to repurchase and retire shares in Q2.
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Huge gains for the stock following the company’s Q2 report show this was a smart move.
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Salesforce (NYSE: CRM) has been a battleground stock over the last year. While the company’s position in the customer relationship management space has generally continued to look quite strong, some investors have worried about the potential for its business to be disrupted by artificial intelligence.
Partially in response to valuation pressures affecting its stock, the company has moved forward with an aggressive share repurchasing program. In this year’s first quarter, the software specialist carried out a record $27.1 billion in buybacks. On the heels of the software-as-a-service (SaaS) company’s second-quarter report, this looks like a great move.
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Salesforce has scored big with its buybacks
When a company believes that its shares are undervalued, buying back and retiring its own stock can be a great way for it to boost earnings per share. With the fourth-quarter report that the company published in February, Salesforce announced that its board of directors authorized a $50 billion stock buyback program.
For much of the last year, Salesforce saw its valuation depressed in conjunction with the “SaaS apocalypse” narrative that saw investors betting that many software companies would have their businesses eroded by the rise of new alternatives powered by artificial intelligence. The stock hit a 52-week low of roughly $146 per share in June and currently trades at roughly $246 per share, but the company continued to bet on itself with buybacks this year.
With the Q2 report that the company published in August, the company’s confidence appears to have been vindicated. The business recorded non-GAAP (adjusted) earnings per share of $5.90 that crushed the average analyst estimate of $3.27, and sales of $11.35 billion in the period also beat the average analyst target by roughly $30 million.
The company’s huge earnings beat in Q2 was heavily powered by an increase in the value of its stake in Anthropic, but that was hardly the only win for the software specialist. Salesforce’s free cash flow increased 81% year over year to $1.1 billion, reflecting the combined benefits for sales growth and improved operational efficiency. And while the company didn’t provide a dollar value for its stock repurchases in the quarter, it reduced its net share count by nearly 50 million even after accounting for stock-based compensation.
Thanks to its strong Q2 report, Salesforce stock rocketed 40% higher in August’s trading. In other words, the company had been buying back shares through the first half of the year at a huge discount relative to its current valuation levels. Not only does this boost earnings per share at prices that increase value for shareholders, but it also shows that the company is managing capital effectively and vindicates the leadership team’s confidence in the company’s market position even as AI shifts the industry.
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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Salesforce. The Motley Fool has a disclosure policy.
