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Salesforce Stock: Can CRM Giant Outrun Its Multiples?
Stock Analysis & Ideas

Salesforce Stock: Can CRM Giant Outrun Its Multiples?

I am neutral on Salesforce (CRM) because Wall Street’s bullishness on the stock, and its strong growth momentum, is offset by valuation multiples that indicate the stock is trading at a premium.

Salesforce has been the leading customer relationship management (CRM) software provider in the world by revenue for eight consecutive years. (See Analysts’ Top Stocks on TipRanks)

After generating $21.3 billion in revenue in FY 2021 (24.3% year-over-year growth, and more than double its revenue in FY 2018), it also is the fastest growing of the top five enterprise software companies worldwide.

Strengths

Salesforce has a strong customer and staff network, with over 150,000 users, and more than 20,000 employees worldwide.

It operates primarily through subsidiaries in the U.S., Europe, Japan, and Asia. These strengths have helped Salesforce earn several leadership awards, and recognition from reputable authorities, including being named as one of Fortune’s World’s Most Admired companies, and one of the World’s Best Workplaces.

It has also been named on Fortune’s Change the World list, and its Future 50 Top 10.

Recent Results

Salesforce’s second fiscal quarter showed continued strong growth. Revenue came in at $6.3 billion, an increase of 21% on a constant currency basis year-over-year.

The $5.9 billion in Subscription and Support revenue was an increase of 22% year-over-year, and the $0.4 billion in Professional Services and Other revenues was an increase of 37% year-over-year

Profitability was also strong, as the operating margin of 5.2% on a GAAP basis and 20.4% on a non-GAAP basis showed strong operating efficiencies. As a result, earnings per share came in at a healthy $0.56 on a GAAP-diluted basis, and $1.48 on a non-GAAP-diluted basis.

The balance sheet remained sound with $0.4 billion cash generated from operations. and $9.7 billion in cash, cash equivalents, and marketable securities on hand.

That said, the company did have $36.2 billion remaining in performance obligations, an increase of 18% year-over-year.

Valuation Metrics

Salesforce’s stock looks a bit expensive right now as its EV/EBITDA ratio, P/E ratio, and price-to-free cash flow ratio each indicate the stock is trading above its historical average.

The EV/EBITDA ratio is currently 36x, compared to its five-year average of 28.5x. The P/E ratio is currently 74.4x, compared to its five-year average of 62.8x. The price-to-free cash flow ratio is currently 52.6x, compared to its five-year average of 36.2x.

Wall Street’s Take

From Wall Street analysts, Salesforce earns a Strong Buy analyst consensus based on 30 Buy ratings, six Hold ratings, and zero Sell ratings in the past three months. Additionally, the average Salesforce price target of $320.06 puts the upside potential at 8.8%.

Summary and Conclusions

Salesforce is an outstanding company, as demonstrated by its numerous accolades, its strong growth momentum, and highly profitable business model.

Furthermore, with significant amounts of cash on hand and expected 20%+ annualized revenue and EBITDA growth for the foreseeable future, the company could certainly generate attractive total returns.

That said, investors should keep in mind that it is currently trading well above its historical average valuation multiples, and the consensus analyst price target only indicates modest upside potential in the stock.

Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.

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