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Salesforce vs. SAP: Which CRM Stock is a Better Pick?
Stock Analysis & Ideas

Salesforce vs. SAP: Which CRM Stock is a Better Pick?

The demand for cloud-based customer support solutions has burgeoned during the COVID-19 pandemic, as it resulted in many organizations embracing the work-from-home culture.

According to a Fortune Business Insights report, the Customer Relationship Management (CRM) market is estimated to grow at a Compounded Annual Growth Rate (CAGR) of 12.1% from 2021 to 2028, to $128.97 billion.

A key trend in this industry has been the growing demand for the deployment of CRM suites and solutions through the software-as-a-service (SaaS) model.

Let us compare two such CRM companies, Salesforce and SAP AG, using the TipRanks Stock Comparison tool, and see how Wall Street analysts feel about these stocks.

Salesforce (CRM)

Investors were left unimpressed with Salesforce’s strong Q3 results, as shares tanked 11.7% yesterday to close at $251.5. Investors were disappointed with CRM’s lower-than-expected Q4 forecast.

The company anticipates revenues to range between $7.22 billion and $7.23 billion in Q4, in line with Street estimates of $7.22 billion. This revenue outlook assumes a $285 million contribution from Slack.

The company acquired Slack, an enterprise communications platform, in July this year, in a transaction valued at $27.7 billion.

Salesforce estimates adjusted earnings between $0.72 and $0.73 per share in the fourth quarter, lower than analysts’ projections of $0.81 per share.

When it comes to its Q3 results, Salesforce’s revenues soared 27% year-over-year to $6.86 billion, surpassing Street estimates of $6.79 billion. The solid rise in revenues was driven by a 25% year-over-year growth in Subscription and Support revenue, which is CRM’s major revenue contributor.

But it was the operating margin that was a cause for worry for analysts. The company is targeting revenues of $31.8 billion and an operating margin of 20% in FY23.

According to Monness Crespi Hardt analyst Brian White, the company “continues to aggressively invest back into the business to grow at a rapid rate, [and as a result] the company’s operating margins are well below its long-term operating margin target at maturity of around a mid-30% level.”

Therefore, the analyst believes that CRM cannot be valued on the traditional price-to-earnings ratio but instead it should be valued on the enterprise-value-to-revenue ratio.

Considering White’s basis of valuation for the stock, the analyst reiterated a Buy and a price target of $328 (30.4% upside) on the stock, following the Q3 results.

Analyst White is bullish about the company’s growth momentum, as evidenced by its strong results in Q3. According to the analyst, CRM “is currently trading above its historical EV/Revenue ratio of over 6x since 2007” and the analyst believes that “a premium is warranted given the company’s growth momentum.”

However, the analyst sounded a note of caution as he questioned “the sustainability of a split CEO structure.”

White was talking about the promotion of Bret Taylor as Co-CEO of Salesforce on November 30. Taylor, together with Marc Benioff, will lead Salesforce.

Rest of the analysts on the Street echo White and are bullish with a Strong Buy consensus rating, based on 27 Buys and 4 Holds. The average Salesforce price target of $336.38 implies 33.8% upside potential to current levels.

SAP AG (SAP)

SAP offers a range of solutions that includes customer experience solutions, a portfolio of supply chain solutions, and human resources (HR) solutions.

In Q3, SAP’s cloud momentum got a further boost as the company reported cloud revenues of €2.39 billion, up 20% year-over-year, while total revenues were €6.8 billion, a growth of 5% year-over-year.

SAP’s S4/HANA, a cloud offering for core Enterprise Resource Planning (ERP) processes, saw a greater acceleration in Q3, and revenues jumped 46% over the same period last year to €276 million.

The S4/HANA offering had a current cloud backlog of €1.28 billion, a rise of 60% (non-IFRS) year-over-year. In Q3, SAP added more than 500 S/4HANA customers, resulting in total adoption by around 17,500 customers.

Earlier this year, the company introduced RISE with SAP, which the company described as “a new single offer on a single contract that supports a customer’s transformation journey to an intelligent enterprise.” RISE with SAP continued to see more traction in Q3, with more than 300 customers. (See the Top Smart Score stocks on TipRanks)

According to Oppenheimer analyst Ray McDonough, the RISE with SAP deals could be on track to have more than 1,000 customers this year.

The analyst listed other key positives for the stock, including an increase in large deals “with share of cloud orders >€5M representing 40%, +9pts y/y; Intelligent Spend continues to stabilize; and OCF/FCF [operating cash flow/ free cash flow] outperformance in the quarter points to potential upside to FY guidance.”

Indeed, the company stated that it anticipates cloud revenues of more than €22 billion by 2025, driven by the “acceleration of customers’ move to the cloud and subsequent business transformations.”

As a result, McDonough remained upbeat with a Buy rating and a price target of $155 (19.4% upside) about the stock.

The analyst added that SAP “should continue to benefit from increasing secular spending on cloud, business intelligence, and mobile technologies.” He also expects that new products like S4/HANA “should provide a long-term lift to growth rates.”

Besides for analyst McDonough, JMP Securities analyst Patrick Walravens is the only other analyst who has covered the stock in the past three months.

Together, the analysts are cautiously optimistic, with a Moderate Buy consensus rating about SAP AG based on 2 Buys. The average SAP AG price target of $162.50 implies 25.2% upside potential to current levels.

Bottom Line

It is evident that both CRM and SAP are observing increasing momentum from their cloud offerings. While analysts are bullish about CRM, they are cautiously optimistic about SAP.

Based on the upside potential over the next 12 months, Salesforce does seem to be a better Buy.

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

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >

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