Jeff Smith, the founder of activist hedge fund Starboard Value, has unveiled a new stake in Salesforce and argued the enterprise software maker, along with two other recent technology investments, are “high-quality” and “sticky” businesses at “attractive” valuations.
At an investor forum Tuesday, Smith outlined his thesis on Salesforce, software company Splunk, and website building platform Wix.com, arguing all three have the potential to create “significant” value for shareholders in the next few years through a “better balance” of growth and profitability.
Salesforce’s stock was up 4% as of 11 a.m. Monday in New York. Splunk shares were up 2.5%, the same as those of Wix. It isn’t clear how much Salesforce stock Starboard owns but the firm is said to hold about 5% of Splunk and disclosed a 9% stake in Wix a month ago.
Starboard believes Salesforce should increase its margins to close the valuation discount to peers such as Microsoft and Adobe. The activist criticized Salesforce for failing to take advantage of its position as a market leader.
“The company’s share price has underperformed its benchmark indices, its closest peers, and the broader market over the last three years,” the $8.4-billion hedge fund said in the presentation.
Starboard expressed confidence in Salesforce’s recently refreshed top echelon hitting the $50 billion revenue target for fiscal 2026, nearly double the $26.5 billion recorded in fiscal 2022, which ended January 31. It also noted the company’s announcement of a $10-billion buyback program in August, the first in its history.
In the slides covering Splunk, the activist said the software maker has been plagued by a lack of execution and poor forecasting in recent years but argued this has created an opportunity.
CEO Gary Steele, who was appointed earlier this year in March, and a yet-to-be-identified finance chief should focus on measures to improve free cash flow margins, which now stand at 11%, a far cry from Adobe’s 42% and Autodesk’s 41%, Starboard wrote in the presentation.
The investment firm argued Wix too has “significant” room for margin expansion and highlighted several actions by the company in that direction, including a $150-million cost savings program that was followed by a 12% share price improvement.