This S&P 500 company’s making a huge bet on itself
The S&P 500âs software stocks have faltered recently. And with the companyâs share price down 23% since the start of the year, Salesforce (NYSE:CRM) is taking decisive action.
The firmâs looking to raise $25bn in debt to use for share buybacks while its stockâs down. Itâs really bold, but is it a brilliant or desperate move?
Software as a service
The stock marketâs concerned about artificial intelligence (AI) agents undermining software companies, and Salesforce is one of the biggest potential casualties.
There are a few ways in which this might happen. The most direct is that customers might just build their own AI agents that donât need the firmâs user interface.
Even if customers do stick with the company, subscriptions are currently based on the number of users. But this could be set to fall substantially if AI agents replace humans in a big way.
Salesforce is looking to shift its pricing model, but that means lower recurring revenues. And the stock marketâs taking that very badly, which is why the share price is falling.
Debt and buybacks
A company buying back shares when its stock is cheap can be a really good move. It brings down the number of shares outstanding, which helps increase earnings per share.
Doing this with debt though, is hugely risky. The associated borrowing costs mean the company needs to generate enough cash to offset this for the move to work.
Salesforceâs credit rating was downgraded by Moodyâs after the announcement. So the firm could be looking at something like 4.5% in interest on the debt itâs taking on.
At a price-to-earnings (P/E) ratio of 25, the companyâs going to have to grow its earnings for the move to work. If it doesnât, the consequences could be dire for investors.
Charter Communications
Another S&P 500 company thatâs used debt for share buybacks in recent years is Charter Communications (NASDAQ: CHTR). But that hasnât worked at all well for investors.
Over the last five years, the firmâs earnings per share have increased by 46% despite net income growing by a much, much lower percentage. Thatâs the effect of share buybacks in action.Â
Unfortunately though, the firmâs debt is up 60%. And while this was cheap when interest rates were low, Charterâs now having to refinance these at higher costs.
Thatâs why the stockâs down 64% in the last five years. But the question is whether Salesforce betting big on itself is going to mean it ends up in a similar position.
All-in investing
Charterâs biggest problem is that its core cable TV business has been in decline. And buying back shares hasnât done anything to change that.
Could Salesforce be in a similar position? The companyâs growth has been slowing recently, but itâs not really the same kind of outright declines â at least, not yet.
If the company can fend off the AI threat, the move to buy in its own stock is will turn out to be a brilliant one. But if it canât, the debt could be disastrous. Which is why Iâm looking elsewhere.
The post This S&P 500 companyâs making a huge bet on itself appeared first on The Motley Fool UK.
Should you invest £1,000 in Charter Communications, Inc. right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Charter Communications, Inc. made the list?
More reading
Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Salesforce. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
