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Salesforce Stock: Great Business, Premium Price Tag
Stock Analysis & Ideas

Salesforce Stock: Great Business, Premium Price Tag

Salesforce (CRM) stock has outperformed in 2021, having realized gains of 33.5% compared to the 23.5% gains of the S&P 500.

Can CRM stock continue outperforming? The stock has plenty of reasons to be bullish, but at the same time valuation concerns are evident. I am bearish on Salesforce. (See Insiders’ Hot Stocks on TipRanks)

Positive Factors, Revised Outlook

Salesforce designs and develops cloud-based enterprise software for customer relationship management, and is a leader in its industry.

It has acquired Slack, considering it to be “a more flexible, inclusive and connected way to work” paying a premium of 55%, but at the same time management believes that the added value by this acquisition will be worth the premium paid, generating incremental revenue.

On Investor Day 2021, Salesforce showed some impressive positive stats that have kept investors enthusiastic about the stock in 2021.

The total addressable market for Salesforce’s products and services is expected to reach $248 billion by the calendar year 2025, with an expected compound annual growth rate for calendar years 2021-25 of 13%.

Revenue growth has been consistent and solid with an expected compound annual growth rate of 26% for Fiscal Years 2014-22.

Salesforce has a very positive earnings history, beating estimates in the past eight quarters.

For FY 2022, the expected cash flow is about $5.5 billion, or an increase of about 11.8% compared to the free cash flow of $4.9 billion reported for FY 2021.

Salesforce has a strong balance sheet with a D/E ratio of 0.21 as of July 2021, and a cash-to-debt ratio of 0.62. The latter ratio needs to be monitored as Salesforce has increased its debt level, especially in Fiscal Years 2020 and 2021.

Overall, the fundamentals are strong, but some factors should heed caution.

Valuation: Quite Lofty

Salesforce’s stock has a forward P/E of 64.1, and a trailing P/E of 118. The Price/Sales (ttm) ratio is 11.7, and the Price/Book (mrq) is 5.2.

All of these ratios suggest that CRM stock is now trading at a significant premium compared to its intrinsic value. This is reflected also in the average Salesforce price target given by analysts, which implies an upside of 8.7%.

A History of Stock Dilution

Salesforce has a consistent growth unfortunately related to stock dilution. According to MacroTrends “Salesforce, Inc shares outstanding for the quarter ending July 31, 2021, were 0.950B, a 3.04% increase year-over-year. Salesforce, Inc 2021 shares outstanding were 0.93B, a 9.41% increase from 2020. Salesforce, Inc 2020 shares outstanding were 0.85B, a 9.68% increase from 2019. Salesforce, Inc 2019 shares outstanding were 0.775B, a 5.44% increase from 2018.”

There is an inverse relationship between the intrinsic value of a stock and its total number of shares outstanding, and CRM stock seems to have a weak spot here. Unfortunately, there is no history of share buybacks for the company, which would alleviate the stock dilution problem.

Insider Trading Activity

Corporate insiders have sold $6.6 million worth of shares in the last three months.

This trend should be also monitored, suggesting a potential correction for the stock price.

Wall Street’s Take

Turning to Wall Street, Salesforce has a Strong Buy consensus rating, based on 30 Buys, six Holds, and zero Sells assigned in the last three months.

Salesforce stock has a TipRanks Smart Score 8 out of 10, suggesting that the stock should outperform the market.

CRM Stock: The Verdict

With impressive growth, and a strong business outlook, Salesforce is expensive. It has very positive qualitative features, but ignoring the elevated valuation is risky.

The trend of stock dilution is also a factor to be monitored closely. Salesforce is an example of a great business having a stock price that has risen to price levels that, from a risk analysis, seem to be disconnected from reality.

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

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