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Salesforce Layoffs May Hurt the Stock

After Salesforce’s (CRM) Last week, mass layoff announcementWall Street might have missed one crucial element in its rush to predict higher profit margins from the tech giant.

Mark Moerdler from Bernstein, an analyst who wrote a critical note to Salesforce Wednesday, said that mass firings can actually inhibit sales growth and 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.”

In a 38 page report, the analyst cut his rating to Market Perform from Underperform.

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

Salesforce will be laying off some 7,000 people, and the company will also execute certain real estate exits.

“I’ve been thinking a lot about how we came to this moment,” Benioff spoke 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.”

According to estimates, the company will be charged between $1.4 billion and $2.1 billion for these actions.

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

This comes as Salesforce is being encouraged by Wall Street to increase margins, following a string high-profile deals such as Slack and Tableau.

Salesforce has committed 25% operating margin for the calendar year 2025. It would be a significant increase over the 2022 goal of 20.4%.

Moerdler stated that he sees more “pain” Salesforce is ahead despite new cost savings and suggested that 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 This and more LinkedIn.

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