Salesforce stock (NYSE:CRM) is up 85% year-to-date. Despite recording such tremendous gains, Salesforce’s rally seems to have no brakes. Investors’ enthusiasm is powered by Salesforce’s vigorous revenue growth and even more impressive earnings growth. This trend is set to be upheld in the coming quarters, as Salesforce is currently benefiting from a favorable margin expansion trend whose effects were again evident in the company’s most recent quarterly report. Consequently, I remain bullish on the stock.
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Revenue Growth Isn’t Slowing Down
The enterprise software market remains sluggish, with companies in the space experiencing a significant deceleration in revenue growth. Despite Salesforce being a mature behemoth within this space, already recording annual revenues north of $30 billion, revenue growth remains in the double digits.
In its Q3 financial report, Salesforce showcased a strong performance, with revenues reaching $8.72 billion, reflecting a robust constant-currency growth rate of 11% compared to the previous year. This figure mirrored the momentum observed in the preceding quarter (Q2 revenue growth was also 11%), underscoring a sustained upward trajectory in a tough market environment.
This noteworthy expansion in revenues was propelled by the tireless success across Salesforce’s diverse cloud platforms, encompassing Tableau, Slack, MuleSoft, the Data Cloud, Sales Cloud, and Service Cloud.
Despite a climate of fiscal prudence among enterprises and the widespread deployment of Salesforce’s software across major corporations leveraging CRM solutions, the company exhibited an exceptional ability to cross-sell its offerings. I believe that this demonstration underscores Salesforce’s ability to navigate and even transcend the prevailing market dynamics. This resilience not only impresses but also explains the enduring enthusiasm among investors, vividly reflected in the wild share price rally.
Further, it’s worth mentioning that Salesforce reported a remarkable 80% increase in deals exceeding $1 million during the quarter. Notably, nine out of the top 10 deals featured a wide bundle of six or more clouds. By achieving wide bundle sales, the company is able to achieve significant growth with reduced selling, general, and administrative (SG&A) expenditures.
Salesforce is Riding the Wave of AI with Success
During the ongoing surging tide of artificial intelligence, Salesforce stands at the forefront, strategically poised to seize the GPT-equivalent throne within the CRM domain. It wasn’t long ago that the company introduced Einstein GPT, the world’s premier generative AI for CRM. Since then, the trajectory of Einstein GPT has been nothing short of remarkable, with an astonishing fusion of predictive and generative capabilities facilitating a staggering one trillion transactions every week.
Noteworthy is the fact that, despite hitting the market just a few months ago, Einstein GPT Copilot has swiftly garnered a customer base that includes 17% of Fortune 100 companies. This rapid adoption is a testament to its capabilities, signaling that it should propel Salesforce into a trend of exponential growth. While precise figures remain undisclosed, the unmistakable trend of growth in multi-million-dollar deals, as mentioned above, stresses the pivotal role played by Einstein GPT Copilots in this achievement.
Margin Expansion Drives Exceptional Earnings Growth
Following activist investors swarming the company in early 2023, essentially demanding Salesforce’s management to focus on improving margins, earnings have started to snowball. In Q3, the company’s adjusted operating margin came in at 31.2%, up 850 basis points year-over-year. This follows the 1,000 basis points expansion reported in the previous two quarters, clearly forming a positive trend for the company.
The substantial increase in profit margins has truly unlocked the company’s capacity to generate substantial profits, a stark departure from the predominantly breakeven performance observed in the past. Notably, the operating cash flow in Q3 surged to $1.5 billion, marking an extraordinary 389% year-over-year increase. Meanwhile, free cash flow soared to $1.4 billion, reflecting an astonishing 1,088% year-over-year increase and underscoring exceptional free cash flow conversion.
When reading such crazy earnings growth metrics from such a highly established company with two decades of consistent growth in the industry, it becomes evident why Salesforce’s stock price has experienced such remarkable fluctuations this year.
Further, given management’s guidance, which points towards the continuation of Salesforce’s exceptional earnings growth, it becomes apparent why shares may sustain their strong rally despite their already significant gains.
Is CRM Stock a Buy, According to Analysts?
Regarding Wall Street’s view on the stock, Salesforce features a Moderate Buy consensus rating based on 26 Buys, 12 Holds, and one Sell assigned in the past three months. At $275.00, the average Salesforce price target implies 10.5% upside potential.
If you’re not sure which analyst you should follow if you want to buy and sell CRM stock, the most profitable analyst covering the stock (on a one-year timeframe) is Keith Bachman from BMO Capital, boasting an average return of 21.64% per rating and an 85% success rate. Click on the image below to learn more.
The Takeaway
Salesforce’s astounding 88% year-to-date stock surge appears to be justified by its robust revenue growth, impressive margin expansion, and profitability metrics. With revenues outpacing industry norms, marked success in AI integration, and efficient cross-selling of its cloud platforms to prominent customers, Salesforce appears well-positioned to keep winning despite the shaky enterprise software market. With such momentum, share price gains could persist, sustaining their market-beating trajectory.
