A catalyst for sales force growth

US stock markets broke through all-time highs on hopes that the Fed would cut interest rates. However, not all stocks were equal in this rally, as tech stocks were the main drivers at the time.

While most of the attention is focused on semiconductor stocks driving the race for artificial intelligence (AI) advancements, others have lagged behind but could still catch up. As trends in generative artificial intelligence and cloud computing spending increase, IT stocks will likely be targets for investors hungry for growth. In this list, actions such as Salesforce Inc. New York Stock Exchange: CRM come to mind, along with a worthy competitor – and a more established company – Oracle Co.

The markets have chosen who would support the next cycle, and investors would do well to decode Wall Street’s message for these potential winners. The Technology Select Sector SPDR fund (XLK) has outperformed the broader S&P 500 index by as much as 12% over the past year, implying that bulls are in control of the sector’s bullish momentum.

Salesforce in the eye of the storm

Forecasts for cybersecurity and risk management spending in 2024 indicate a net investment of $215, up 14.3% over the year. Salesforce isn’t just about simplifying business services, it needs to store and protect tons of customer data. With this massive spending hitting the market, it may not be far-fetched to see companies hire Salesforce to help them with these security issues. Today’s hybrid, and often fully remote, workforce represents a major advantage for the continued expansion of this trend.

Data center budgets are expected to grow to $260 billion in 2024. As more of the global economy goes online, Salesforce could also benefit from its data center capabilities. The largest budgets come from IT services, which are expected to reach around $1.5 trillion in 2024, and Salesforce reigns supreme. In a recent survey, companies identified their top priorities for the year, all related to technology spending. The first three are focused on increasing operational efficiency, cybersecurity and transforming current business processes.

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

Wall Street’s top pick

Two factors typically determine stock market prices: earnings growth and underlying fundamentals. Anything added to these pillars starts to cloud investors’ judgment, so that will be Salesforce’s focus.

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

As inflation rates in the United States prove persistent, investors may lose hope in the Fed’s promise of three rate cuts this year. All of this means that stocks with high debt on their balance sheets will have to pay interest. Basically, this favors Salesforce over Oracle. Only 18% of Salesforce’s capital is 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 with a dangerously high debt level of 93%. Any unexpected bumps in the road could seriously cause its stock price to plummet.

Another check comes from analyst ratings. Oracle received a price target of $130 from analysts at Goldman Sachs, giving the stock about 6.3% upside from its current price. Meanwhile, analysts at Stifel Nicolaus have set a $350 price target for Salesforce as recently as April 2024. This rating requires the stock to rise 17% to reach it, nearly triple Oracle’s target upside.

The broader markets seem to agree with these filters, as Salesforce’s price-to-earnings (P/E) ratio was boosted as much as 72 times after the stock hit an all-time high. Oracle’s valuation, despite recently hitting an all-time high, is significantly lower than Salesforce’s at 32.5x. There has to be a good reason for the markets to justify overpaying Salesforce’s earnings. Now investors have a better idea.

Superior earnings growth and the likelihood of receiving a decent share of corporate IT spending act as a magnet for institutional stock purchases. Over the past 12 months, Salesforce has seen a net inflow of $75.5 billion, and it could be just the beginning for 2024.

Before you consider Salesforce, you’ll want to hear this.

MarketBeat tracks daily Wall Street’s highest-rated and best-performing research analysts and the stocks they recommend to their clients. MarketBeat identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market takes hold… and Salesforce wasn’t on the list.

While Salesforce currently has a “Moderate Buy” rating among analysts, top-rated analysts believe these five stocks are better buys.

View the five stocks here