Salesforce (CRM) is an international leader in customer relationship management (“CRM”) technology that helps bring companies and their customers closer. With its Customer 360 platform, Salesforce provides a single source of truth, combining customer data across systems, apps, and devices to assist businesses to sell, service, market, and enhance commerce from any place. I am bullish on CRM stock. (See Analysts’ Top Stocks on TipRanks)
Salesforce’s recent acquisition of Slack, which the company has already started embedding into its products, should allow its clients to become even more productive. Specifically, Salesforce’s plan is to create the most open and interoperable ecosystem of apps and workflows in the enterprise software industry.
Salesforce is an industry leader in the CRM space, marked by its 19.5% revenue market share. In comparison, none of its peers’ revenue shares exceed more than 5% each, including Microsoft, Oracle, SAP, and Adobe.
Growth Expectations Remain Impressive
In late September, Salesforce reported its Q2 2022 results. During the first half of the year, the company generated $3.23 billion in free cash flow on sales of $12.3 billion. Free cash flow grew 75% year-over-year while the free cash flow margin expanded from 18% to 26%, driven by solid growth in higher-value client accounts.
In fact, the amount of customers that spend at least $10 million annually on CRM has grown at a 40% CAGR over the past four years. Management remains confident that Salesforce will not only retain its industry-leading position but also outperform its peers in the medium term in terms of growth.
The firm raised its revenue guidance for Fiscal Year 2022, expecting to achieve sales between $26.25 billion and $26.35 billion (previously $26.20 billion to $26.30 billion). This range suggests 24% growth versus the prior year. Further, the company’s outlook for Fiscal Year 2023 signals for revenues of $31.65 billion to $31.80 billion, suggesting the company will retain growth of at least 20%.
Moving further away, Salesforce expects to achieve around $50 billion in revenues by Fiscal Year 2026. Considering the ongoing digital transformation which the pandemic has boosted, this estimate should not surprise investors. This target suggests a revenue CAGR of 19% from Fiscal Year 2021’s revenues, which prices in a modest slowdown towards 2025-2026.
As mentioned, the company’s free cash flow margin has stood at around 26% lately. If we assume a reasonable expansion towards about 33% following economies of scale, Salesforce could deliver free cash flow of approximately $16.5 billion on an annualized basis by 2026.
The Valuation
Salesforce’s revenue growth has remained above 20% for 65 consecutive quarters. Only in a couple of quarters revenue growth slightly slipped marginally below. The stock’s forward price-to-sales ratio (January 2023) currently stands at around 9.1x, which in my view, is a fair multiple considering management’s expected growth ahead.
With a relatively rich free cash flow margin in the industry, it’s quite likely that this multiple will be retained in the medium term. In other words, assuming the stock does maintain this multiple and the company grows revenues at a CAGR of around 19%, as indicated earlier, investors should, in theory, experience equivalent annualized returns.
Salesforce also tends to beat its own estimates, which could result in an even more attractive growth pace. For these reasons, I am bullish on the stock.
Wall Street’s Take
Turning to Wall Street, Salesforce has a Strong Buy consensus rating, based on 27 Buys and four Holds assigned in the past three months. At $336.38, the average Salesforce price target implies 13.4% upside potential.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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