Salesforce (CRM) stock was upgraded from "Peer Perform" to "Outperform" with a price target of $315 per share by Wolfe Research. Alex Zukin, Wolfe Research Managing Director & Head of Software Research, joins Yahoo Finance to discuss the upgrade as well as what could happen if Salesforce got involved in a potential merger or acquisition.

"If they do go down that road, I think the ability to... pick and choose and very cogently outline the profitability potential, and the accretion potential of the M&A is going to be very important," Zukin says on M&A activity. "My opinion is that you're going to be looking at Salesforce to do more tuck-ins, more [of] the aqua-hire type of deals rather than the big meaty diluted M&A of the past."

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Video Transcript

JULIE HYMAN: I want to switch gears a little bit and broaden it out to your outlook for 2024. You were out with an extensive note, and an amusing one, looking at what's going on for 2024. But let's zero in on one of your top calls for next year. And that's Salesforce, which you're upgrading to an outperformance saying that's one of the best bets here. What do you think Salesforce has got to get right next year for it to perform as you're talking about?

ALEX ZUKIN: Yeah, I think it's a combination of three points. I think point one is double-digit growth. I think this is a company that has a lot of wind at its back. I think the organic product innovation around Data Cloud, I think the pricing opportunity and the uplift possible from generative AI in the portfolio, and I think just the renewed culture and sense of selling enables this company to perform at least as good as we think they can executing to double-digit growth for the next few years.

I think point two is a commitment for that growth to be profitable, responsible, and that's language for margins that are going to continue to go up. I think if you look at where the company crossed a pretty meaningful threshold and operating margin performance this year all the way up to 30%, I think that's a great start and they should be extremely proud of that.

And I think the next stop is 40%. That's where you go from really strong and solid to iconic. I don't think they're going to get there next year, but I think the journey to get to 40%, matching companies like Microsoft, Adobe, and the like is something that this is-- there's no reason why Salesforce can't get there. And I think that unlocks a lot of incremental earnings power, a lot of incremental free cash flow that investors are going to want to underwrite and invest behind.

And finally, I think a commitment to responsible M&A has been something the company has talked about the last few earnings calls. I think that's going to be really important for this stock to keep on working, where whether it's small tuck-ins or larger strategic deals, having at the outset really a framework and a commitment to how that can be accretive to either the growth and the profitability of the company is going to be super important for investors. And they have all the attributes to do that.

- I wanted to ask you about that Alex because Marc Benioff, he likes to pull the trigger on big acquisitions. So I guess is part of your call here you think there's just minimal risk that he's going to do that next year because obviously that would have a big impact on where you think margins are headed.

ALEX ZUKIN: Yeah. That's probably the most important crux of the bet. And look, I actually-- I bring the Figma-Adobe situation right back into the mix here. You know, part of the settlement here is that the regulators are saying no to big strategic M&A, and I think that's actually a positive for Salesforce. I think it's going to be harder for them to engage in larger strategic M&A, not impossible certainly, but I think it lowers the likelihood that they would pursue that.

Now, I will also say that if they do go down that road, I think the ability to, you know, really be-- to pick and choose and to very cogently outline the profitability potential and the accretion potential of the M&A is going to be very important. But my opinion is that you're going to be looking at Salesforce to do more tuck-ins, more kind of the acqui-hire type of deals rather than the big, meaty dilutive M&A of the past.