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Salesforce: Attractively Priced Following the Recent Correction
Stock Analysis & Ideas

Salesforce: Attractively Priced Following the Recent Correction

Salesforce (CRM) is a global leader in customer relationship management (“CRM”) technology that enables companies and customers to come closer. With its Customer 360 platform, Salesforce supplies a single source of truth, integrating customer data across systems, apps, and devices to help businesses to sell, service, market, and improve commerce from any place.

The company benefits from robust industry demand as companies all over the world increase spending on digitalization. Along with Salesforce’s recent acquisition of Slack, the company enjoys multiple growth catalysts ahead. Salesforce’s objective of creating the most open and interoperable ecosystem of apps and workflows in the enterprise software industry is approaching reality by the quarter.

Following the recent correction in the tech sector, Salesforce saw its stock decline substantially from its 52-week highs of $311.75. Currently trading at just over $232, I believe shares are attractively priced. Hence, I remain bullish on Salesforce.

Growth Remains Robust

In late November, Salesforce reported its Q3-2022 results, with numbers coming in strong. During the first nine months of the year, the company generated $3.46 billion in free cash flow on sales of $19.1 billion. Free cash flow expanded 70% year-over-year while the free cash flow margin expanded from 12.9% to 18.1%, driven by robust growth in higher-value client accounts.

Management believes that Salesforce is more relevant and strategic than ever as all types of companies rev their digital transformation goals. With the underlying market demand exceeding expectations, Salesforce raised its revenue guidance for Fiscal Year 2022, expecting to achieve sales between $26.39-$26.40 (previously $26.25 billion to $26.35 billion).

This range implies 24% growth versus the prior year. Further, Salesforce’s guidance for Fiscal Year 2023 forecasts for revenues of $31.7-$31.8 billion (previously $31.65 billion to $31.80 billion), suggesting the company will maintain a growth rate of at least 20%.

With the incredible strength of its Customer 360 platform and Slack, management reassured investors that Salesforce is on track to reach $50 billion in revenue in Fiscal Year 2026. This target implies a revenue CAGR of around 19% from Fiscal Year 2021’s revenues, which includes a subtle slowdown towards 2025-2026.

If we assume a rather reasonable, in my view, free cash flow margin expansion towards around 33% amid economies of scale achievements through 2026, Salesforce could be posting free cash flow of about $16.5 billion on an annualized basis by then.

The Valuation

Salesforce’s revenue growth has been maintained above 20% for 66 consecutive quarters. Only in a couple of quarters growth marginally descended below.

The stock’s forward price-to-sales ratio (January 2023) currently stands at around 7.2x, which I find quite attractive considering management’s promising medium-term estimates. Salesforce is also generally regarded as being one of the highest quality growth stocks, which could be a catalyst towards a medium-term valuation expansion.

Along with above-average free cash flow margin prospects in the industry, investors shouldn’t be surprised if the stock undergoes a multiple expansion towards its pre-correction levels sooner than later.

Wall Street’s Take

Turning to Wall Street, Salesforce has a Strong Buy consensus rating, based on 23 Buys and three Holds assigned in the past three months. At $337.87, the average Salesforce stock forecast implies 45.6% upside potential.

Conclusion

Even if Salesforce’s stock failed to undergo a valuation expansion, and we assume the stock retains its current multiple while growing revenues at a CAGR of around 19%, as explained earlier, investors should, hypothetically, enjoy equivalent annualized returns.

Considering that Salesforce generally tends to beat its own forecasts, which could lead to an even more rapid growth pace, I find the stock’s investment case quite compelling.

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