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Salesforce is the gold standard of Software as a Service (SaaS) and one of the best cloud computing stocks.
But is Salesforce stock a buy? Let’s find out in this Salesforce Stock Analysis and Forecast.
What is Salesforce?
Salesforce.com, Inc. is a cloud-based software company that provides customer relationship management (hence the ticker symbol) services and other enterprise applications that make businesses more intelligent.
It was founded during the dot-com bubble in 1999 and has thrived long after the bubble bursted. In 2020, Salesforce was ranked #2 in the “100 Best Companies to Work For” by Fortune Magazine.
Salesforce has a suite of applications that companies subscribe to – they only select the applications they need, which creates a customizable dashboard of business insight that reduces costs and complexity.
Salesforce currently offers 14 enterprise apps, such as “Sales”, “Marketing”, and “Employees”. Larger corporations may subscribe to all 14 offerings, while small businesses may opt for just one.
Customers love Salesforce because it improves every aspect of their businesses. Wall Street likes Salesforce because of its subscription-based recurring revenue model and sticky products.
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Salesforce (CRM) Investment Potential
#1. Recurring Revenue from Subscriptions
A subscription-based revenue model is favorable because it allows a company to prioritize operations beyond short-term financials.
Recurring revenue makes Salesforce more stable and predictable, lethal when combined with other characteristics like high growth and innovation.
Many companies try to emulate Salesforce’s business model and tout that they’re the “Salesforce of (insert industry)” – most notably CrowdStrike CEO Geroge Kurtz, who sees his company as the “Salesforce of Security”.
“Subscription and support” accounted for 94% of the company’s total revenue in total fiscal 2021.
A subscription model leads us to Salesforce’s next strength: upselling and cross-selling opportunities.
#2. Upselling and Cross-Selling Opportunities
Salesforce’s flagship offering, “Customer 360”, is the world’s #1 CRM. While the 14 individual apps are valuable in their own respect, the offerings’ vertical integration has separated them from the competition.
Example: Walter owns a small business and decides to purchase the “Sales” module from Salesforce. He is blown away by the insights and has significantly increased revenue by adjusting to the sales data. He decides to take a portion of this revenue and purchase the “Marketing” module from Salesforce. The marketing insights have made the ads more effective, which has brought more customers into the shop. To accommodate the demand, Jeremy hires new employees and purchases the “Employees” module to assist in payroll and taxes.
This cycle continues until Jeremy settles on the optimal number of Salesforce apps or until he purchases all 14 and goes public at a $100 billion valuation.
#3. Sticky Products
By design, Salesforce products thread themselves through the fabric of the company. This makes it very difficult for customers to part ways with Salesforce.
It’s pretty much game over for SaaS competitors once Salesforce executes on upselling additional modules.
It’s far too expensive and labor-intensive to integrate all of these systems onto another platform.
In addition, there’s little incentive for companies to leave Salesforce in the first place. So not only is it costly and laborious to do, but Salesforce products add so much value that companies have no desire to leave.
It’s one thing for a product to be logistically sticky, but it’s entirely different when the product is sticky because of its effectiveness alone—Salesforce benefits from both.
#4. Software Is Eating the World
The pandemic’s acceleration of digital adoption resulted in a record year for Salesforce. Companies that had insufficient digital capabilities suffered while their counterparts thrived.
Following the COVID-19 crisis, many behaviors and systems will return to pre-pandemic norms. The adoption of software will not.
Whether it’s a Fortune 500 that sells microchips or a mom-and-pop shop that sells cupcakes, businesses of all types have realized the necessity of a digital presence.
Software providers like Salesforce are driving this transition and will continue to benefit from their efforts.
A company’s “moat” typically refers to its competitive advantage over other businesses in its sector, enabling it to protect and expand its market share and profitability.
Salesforce’s primary moat is its ability to embed its apps into the DNA of its customer’s companies. Salesforce becomes the heartbeat of the company, which forces clients to become extremely dependent on its services.
Additionally, Salesforce is a one-stop shop for enterprises because of its range of offerings. Customers prefer keeping software under a single roof to cut down on costs and complexity.
So, instead of a business going to Company X for Marketing, Company Y for Analytics, and Company Z for Commerce, it just goes to Salesforce for all three (while most likely getting superior service at lower costs).
Being one of the industry’s first SaaS has allowed it to perfect these strategies over the last two decades.
See: Tesla Stock Analysis
Salesforce Stock Analysis
Salesforce reported a strong fourth quarter and full-year fiscal 2021 results in its most recent earnings call. Here are the highlights from the February 25, 2021 announcement:
- Q4 Revenue of $5.82 billion vs $5.68 expected, up 20% YoY
- Q4 Earnings of $1.04 per share (adjusted) vs $0.75 expected
- FY21 Revenue of $21.25 billion, up 24% YoY
- FY21 non-GAAP diluted Earning per Share was $4.92
- FY21 GAAP Operating Margin of 2.1% and Non-GAAP Operating Margin of 17.7%
- Raises Q1’22 Revenue Guidance to approx. $5.885 billion, up 21% YoY
Salesforce Chair and CEO Marc Benioff said, “We had a record quarter and year by innovating more and faster than ever, enabling our customers to be successful from anywhere, and becoming more relevant and strategic than ever.”
Analysts were pleased with the company’s revenue guidance for the full 2022 fiscal year but were underwhelmed by earnings guidance.
Limited earnings expectations resulted from the company’s acquisition of the business communication company Slack, which amounted to $27 billion.
As of this writing, Salesforce stock is up 4.4% YTD compared to 10.4% from the S&P 500.
Salesforce (CRM) Competition
There’s no shortage of competition amongst high-growth cloud companies. Given Salesforce’s wide range of offerings, it welcomes competition from countless opponents.
This report has referenced Salesforce as a “SaaS company” because that is the medium for its primary CRM offering, but it competes in several other markets like Infrastructure as a Service (IaaS) and Platform as a Service (PaaS).
This section will list Salesforce’s top competitors by market:
- Office 365 and Dynamics CRM from Microsoft (MSFT)
- Amazon Web Services SaaS (AMZN)
- Box (BOX)
- Google Workplace (GOOG)
- Palantir (PLTR)
- Adobe Creative Cloud (ADBE)
- Oracle (ORCL)
- DocuSign (DOCU)
- Automatic Data Processing (ADP)
- Workday (WDAY)
- AWS (AMZN)
- Microsoft Azure (MSFT)
- Google Cloud (GOOG)
- Alibaba Cloud (BABA)
- Tencent Cloud (TCEHY)
- Oracle Cloud (ORCL)
- Microsoft Azure (MSFT)
- AWS (AMZN)
- Google App Engine (GOOG)
- IBM Cloud (IBM)
Obviously, there’s overlap amongst Big Tech in many of these markets. Competition is fierce in software and cloud verticals, and it will only increase in the future.
Salesforce Stock Bear Case
The company is positioned well to continue its success, but Salesforce stock might have had its best days. Since going public in 2004, Salesforce stock is up 5,300%.
This doesn’t mean it won’t continue to appreciate, but there might be a higher upside in younger SaaS companies. Of course, more room for growth comes with more risk.
Investors should also note that the digital adoption wave may have already been priced into the stock in the short term. From its March 2020 lows, the stock doubled in price just six months later.
Salesforce Stock Allocation in Your Portfolio
The right allocation of Salesforce stock in your portfolio depends on various personal factors. However, the following questions might help with allocation decisions:
- Can Salesforce compete with the trillion-dollar capabilities of FAAMG stocks?
- Can Salesforce fend off agile disruptors in the software space?
- Is there better upside in other cloud computing names?
- Is Salesforce’s business model sustainable?
- Is Salesforce on the right side of digitization?
- Is the Invesco QQQ ETF a better allocation to technology?
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Salesforce Stock Analysis FAQs
Is Salesforce stock a buy?
Many analysts rate Salesforce stock a “buy” because of its excellent business model and superior product offerings. Most of Salesforce’s total revenue comes from subscriptions, which makes the company’s financials and operations more predictable.
Will Salesforce ever pay a dividend?
Salesforce does not pay a dividend, which is common amongst high-growth technology companies. These companies reinvest their earnings into growth strategies instead of distributing the capital to shareholders. The possibility of high growth and stock price appreciation attract investor capital instead of the issuance of a dividend.
What does Salesforce do?
Salesforce offers software products that make life easier for businesses. Its modular framework allows companies to only pay for the applications and services they need. Salesforce currently offers 14 apps on its “Customer 360” offering:
- Einstein AI
See: Apple Stock Analysis
Bottom Line: Salesforce Stock Analysis
Salesforce is the global leader in CRM and sets the industry standard for software companies. While Salesforce’s rise is aspirational, many companies are tirelessly working to dethrone it.
It will be exciting to follow Salesforce in the coming years and continue to raise the bar for the entire software space.
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Sean Graytok does not own shares of Salesforce.com, Inc.