With the pandemic raging & digital customer solutions becoming more & more important, we should answer the question: Is Salesforce (Ticker: CRM) stock a buy?
In today’s world, a company’s ability to communicate with its customers, manage its consumer & business data, and its enterprise management solutions are just as crucial as their ability to sell their core product or service. Luckily for us, there is one amazing way to play this rapidly growing market (the CRM market is expected to grow 10-11% annually worldwide) - and even more fortunately, this play is the largest player in this world!
To truly understand Salesforce’s scale, we need to look at it’s comparative market share. Salesforce has a 20% global market share, vastly higher than all of its competitors which are stuck in the single digits - and are characterized by many other business operations and aren’t pure plays on the expanding industry (as opposed to Salesforce, which at worse owns companies with adjacent industries and platforms that complement one another in the enterprise space).
This dominance has led to serious scale & pricing power that drives increased margin & profits expansion (excluding one time impacts of acquisitions). Salesforce is characterized by industry leading 75% gross margins & 20% operating margins (in normal years).
All of this makes its relative undervaluation all the more surprising. Salesforce has forecasted & has a historical growth rate of continuing its sales expansion of 20% a year on a CAGR basis (it is expecting to double revenues within the next 5 yrs). With a f p/e of 60 & a p/s ratio of close to 10, their valuation is favourable when compared to the SaaS industry in general, and especially with other large-cap tech stocks with median growth (most SaaS companies around 20% sales growth go for about 12-13 p/s, and 150 f p/e’s. Adobe, which is arguably the most similar company on a comps basis goes for around 50 f p/e & 20 p/s (with other similar companies like adsk having lower f p/e ratios, but higher p/s ratios, generally near 17-18).
Essentially, we can see that on an earnings basis, Salesforce is pretty undervalued, though the real value is realized in the p/s valuation. In this case, I think the p/s valuation is the most indicative. This is because, first of all, they spend an outsized amount on marketing & selling expenses to fuel growth - something that suggests that they could definitely seriously improve profitability if necessary if they were willing to drop their sales growth to a more reasonable level (like 13 or 15%). Their profits also traditionally suffer from outsized acquisitions used to boost sales growth & expand their operations in their pursuit for the most comprehensive enterprise suite (this is very useful since it reduces their tax liability & leads to compounding performance down the road).
Now, it is time to talk about their future strategy, especially relating to their recent acquisitions of Slack. Salesforce has a history of making opportunistic acquisitions (like Mulesoft & Tableau), which are both growing at a faster clip than the core business and seem to have been accretive acquisitions. I believe the slack acquisition to be no different (despite current investor sentiment). They reported that slack grew 40% in the past quarter & Salesforce has begun implementing it as their core enterprise management software. This is great since over the pandemic the two ecosystems used by workers were generally slack & zoom, and so Salesforce now has created a great opportunity for cross-selling and up-selling to its existing products cross-platform. This continuous cross-selling & value addition is exemplified by their industry leading attrition rate (below 9%). These acquisitions are all very reasonable due to the very strong balance sheet they’ve developed (with a net 9B in cash & investments after debt).
In conclusion, the company’s excellent future prospects, relative undervaluation & strong potential for margin expansion make it the perfect mix of growth & value for a portfolio with a long-term outlook (especially since their dominant position gives them a lower risk profile).
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By: Mateo Gjinali
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