Important! This article is not intended as investment advice.
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3 Reasons to Buy Salesforce.Com Stock Even Now
By Sherrill St. Germain
July 2017
US markets are trading near all-time highs. Tech stocks are looking mighty bubbly. And shares of cloud software giant Salesforce.com [NYSE: CRM] are already up 30% this year. Nonetheless, this stock remains a great buy. Here’s why.
1. Wearing Big-Boy Pants
Salesforce.com may have its head in the cloud – so to speak – but its feet are on solid ground. Founded in 1999, it boasts a solution set described by analyst Morningstar, Inc., as “the broadest and deepest in the customer relationship management (CRM) market.” A $60B company with $8.39B revenues and 26,000 employees, Salesforce.com is now in its third year on the Fortune 500.
A short trip down Memory Lane sheds some light on what prompted this meteoric growth and why it is poised to continue. The name Salesforce.com hearkens back to its origins, when it delivered a powerful one-two punch with its introductory offering. For starters, this salesforce automation application enabled customers’ sales teams to sell more efficiently.
Nice, but the real differentiator was its cloud architecture. Based on the then-nascent, now red-hot software-as-a-service (SaaS) model, the product eliminated a major customer pain point: the headache of in-house infrastructure. The knockout combination of increased sales/lower costs was a no-brainer for the many who flocked to Salesforce.com.
Orders-of-magnitude greater potential lay in this flexible underlying platform, which allowed Salesforce.com to rapidly round out its CRM offering with feature-rich applications for customer service, marketing, and more. While the flagship Sales Cloud product still accounts for 35% of revenues, it is only one of three topping $1B annual revenues, reflecting a diversifying product portfolio. Its 18.1% market share is almost double that of its nearest competitor. International sales make up nearly a third of its revenues.
2. Still Growing Like a Weed
There’s no question Salesforce.com is playing with the big boys, yet the company still maintains the youthful glow of an upstart disrupting markets. Perhaps this is because its growth rate rivals that normally associated with much smaller companies. According to research firm Needham & Company, LLC, most say goodbye to 20% year over year revenue growth before they are a fraction of Salesforce.com’s size. Better still, the factors driving this incredible growth appear to be sustainable.
First, Salesforce.com has experienced a move upmarket. Having cut its teeth on small and mid-size businesses, its capacity to reduce costs in customer-facing operations was not lost on enterprises, who stand the most to gain. These days, Needham estimates that 1,300 customers spend more than $1M with the company each year, including 84 exceeding $10M.
Second, customer attrition rate is declining, due not least to high switching costs. Rather than face the expense and disruption of swapping out their entire infrastructure, customers have plenty of incentive to stick around and make it work.
So the company is doing a lot right. But they’re also getting a big boost from being in the right place at the right time, surfing the SaaS/cloud computing wave all the way to market dominance. While the explosion of SaaS is news to no one, technology analyst Gartner, Inc., projects annual growth of 13.7% in the CRM market, making it the fastest-growing enterprise software.
3. Still Eating Its Wheaties
CEO Marc Benioff has done an enviable job steering his company through uncharted waters over its history. Recent developments suggest he still has an expert hand on the tiller.
In addition to growing organically, Saleforce.com has been bolstering its offering via a series of acquisitions, including 9 in 2016 alone. Capabilities added include e-commerce services, artificial intelligence, mobility, social networking, and analytics – precisely the hot technologies needed to deliver another quantum leap in CRM.
The company also aims to expand via its “ecosystem.” This encompasses the set of customers, partners, and independent software developers who use its application programmer interface (API) to expand and share functionality via AppExchange. IDC projects this could have an impact of $389B on US GDP, as well as create 1.9M jobs by 2020.
Not content to disrupt US markets, Salesforce is actively expanding in less-tapped foreign arenas. It is also diving into vertical markets such as healthcare and financial services.
Too Big for Its Britches?
Not surprisingly, Wall Street has responded enthusiastically. After going public in 2004, Salesforce.com stock outpaced Google’s post-IPO 12-year gain of 1,780%, according to Fortune magazine. Eye-popping returns have kept up through 2017’s continued bull market. Indeed, shareholders have been richly rewarded for their faith in the company’s ongoing ability to surpass expectations for growth.
But shark-infested waters await. Formidable giants Microsoft, Oracle, and SAP are swimming in the same seas. Salesforce has still to deliver on the promise of recent acquisitions. Its cloud architecture and mission-critical nature make it a target for hackers. Is Salesforce about to do the stock valuation equivalent of splitting its pants?
Even in the face of potential growing pains, Salesforce seems poised to thrive. It recently landed among the top 13 growth companies that pass the Goldman Sachs “rule of ten.” This test uses sales and profitability growth measures to identify stocks trading at what it considers “reasonable valuations.”
Argus Research Company points to growth in deferred revenue as an indicator of the “robust nature of the company’s sales pipeline.” Analyst CFRA cites profit margins heading in the right direction, while Morningstar sees upside in operating efficiencies. These positive fundamentals should buoy the share price.
Real value aside, the stock is likely to fall when investor sentiment turns bearish. But CEO Benioff has been there before. It took less than one year for Salesforce stock to recover from its Great Recession low to its prior high and continue its stunning march upward. It’s a little late to party like it’s 2009, and Salesforce is a much bigger vessel to steer. But as solid long-term investments go, it’s tough to beat this company’s track record of whip smart strategy combined with unbeatable execution.