Corporate IT Spending Rebounds Could Push Salesforce Stock Higher

The U.S. stock markets broke past all-time highs in hopes of the Fed cutting interest rates. However, not all stocks were equal in this rally, as technology stocks were the main drivers at the time.

With most of the focus on semiconductor stocks pushing the race to artificial intelligence (AI) advancements, others were left behind but could still catch up. As trends in generative AI and cloud computing spending surge,  Information Technology (IT) stocks will likely be targets for growth-hungry investors. On this list, stocks like Salesforce Inc. NYSE: CRM come to mind, along with a worthy competitor — and a more established company — Oracle Co.

Markets chose who would back this coming cycle, and investors would be wise to decode Wall Street's message for these potential winners. The Technology Select Sector SPDR Fund (XLK) outperformed the broader S&P 500 by as much as 12% over the past year, implying that bulls are in control of the sector's uptrend momentum.

Salesforce in the Eye of the Storm

The forecast for cybersecurity and risk management spending in 2024 points to a net $215 investment, up 14.3% over the year. Salesforce not only deals in making business services easier, but it has to keep – and protect – tons of customer data. With this massive spending hitting the market, it may not be far-fetched to see businesses hire Salesforce to help them with these security concerns. Today's hybrid — and often fully remote — workforce is a major tailwind for this trend to continue expanding.

Data center budgets are projected to grow to $260 billion in 2024. As more of the global economy goes online, Salesforce could benefit from its data center capabilities as well. The largest budgets come from IT services, set to reach approximately $1.5 trillion in 2024, and Salesforce reigns king there. In a recent survey, businesses identified their top priorities for the year, and they are all related to technology spending. The top three are focused on increasing operational efficiency, cybersecurity and transforming current business processes.

If Salesforce were the one to take on the task, the markets would have something to say about the stock. Here is how investors can decode Wall Street's sentiment.

Wall Street's Pick of the Litter

Two factors typically drive stock market prices: earnings growth and underlying fundamentals. Anything added to these pillars starts to cloud investor judgment, so that will be the focus for Salesforce.

Analysts believe that Salesforce could grow its earnings per share (EPS) by 15% over the next 12 months, above the average IT industry expected growth of 10%. At the same time, Oracle's projections reached only 12%, meaning that Wall Street may favor Salesforce's services over Oracle's in this spending wave.

As inflation rates in the United States prove stubborn, investors may lose hope in the Fed's promise of three rate cuts this year. All this means that stocks with high debt on their balance sheets will need to pay up in interest charges. Fundamentally, this favors Salesforce over Oracle. Only 18% of Salesforce's capital is made up of debt; even at today's higher rates, it won't hurt the company's bottom line much. On the other hand, according to its financials, Oracle operates at a dangerously high debt level of 93%. Any unforeseen bump in the road could seriously throw its stock price off.

Another check comes from analyst valuations. Oracle received a $130 price target from Goldman Sachs analysts, giving the stock an approximate 6.3% upside from its current price. Meanwhile, Stifel Nicolaus analysts slapped on a $350 price target for Salesforce as recently as April 2024. This valuation calls for the stock to rally by 17% to meet it, almost triple the upside in Oracle's targets.

Broader markets seem to be okay with these filters, as Salesforce's price-to-earnings (P/E) ratio was bid up to 72x after the stock reached an all-time high. Oracle's valuation, despite also recently reaching an all-time high, falls significantly below Salesforce's at 32.5x. There must be a good reason for markets to justify overpaying for Salesforce's earnings. Now investors have a better idea.

Superior earnings growth and the likelihood of receiving a decent chunk of corporate IT spending act as a magnet for institutional buying in the stock. Over the past 12 months, a net inflow of $75.5 billion was recorded for Salesforce, and it may only be the start for 2024.