Investment idea # 4:
Buy Salesforce.com Inc (CRM US)
Trade parameters:
Entry price: $150-$160
Stop loss: Below $140
Exit price: target 1 — $210, target 2 — $230
Investment horizon: 12 months and beyond
Business Overview
Salesforce.com develops and delivers business software to companies worldwide to help them manage their business operations and interact with their customers. It is well-known for its customer relationship management software (CRM) with over 150,000 users. The company offers cloud-based products such as Sales Cloud, Service Cloud, Marketing and Commerce Cloud, Community Cloud, IoT Cloud, Analytics Cloud, Salesforce platform and others. The company’s customers are from different industries, including entertainment, financial services, telecommunications, government and others. Most of these cloud services are run on Amazon Web Services, Google and IBM. To promote its products, the company uses mainly a direct sales team on the telephone, while working with consulting firms and systems integrators.
Operations
Because not a single customer’s contribution exceeds 5% of sales, salesforce does not depend on any particular customers in generating its revenue. 95% of the revenue is generated from the subscription and support segment, while minority of it comes from professional and other services. Geographically, the company’s services are popular with US customers, contributing two-thirds of the revenue. Europe’s share in the total revenue is around 20%, while Asia/Pacific accounts for 10%. The company spends about 45% of its revenue on sales and marketing and about 15% on research and development.
Graph 1. Revenue by Region
Salesforce states that it is making incremental investments in international markets increasing its market share globally. Of course, it is important to note that the market size of data sciences and software applications has been increasing rapidly during the last years and it is expected to continue to in that direction. And, Salesforce is well-positioned to take advantage of these increasing opportunities.
Graph 2. Total addressable market growth from CY17-CY23
Growth Outlook
Salesforce has been increasing its market share by offering new products and services to customers and making numerous acquisitions. For example, it has recently introduced artificial intelligence technology, called Einstein, to its cloud platforms to help businesses better analyze data and build efficient relationships with their customers. This innovation makes Salesforce’s CRM the most advanced system in the world.
Graph 3. Info-graphic Einstein AI
Last year, Salesforce bought a data integration platform MuleSoft Inc, which enables businesses to connect various data sources and applications and perform analytics, for $6.5B. This acquisition accelerated salesforce’s growth by adding $431M in revenue for fiscal 2018. In June 2019, it made the biggest acquisition ever by acquiring Tableau Software Inc for 15.7B, which helps to analyze, visualize and share information on people’s blogs and websites. In the coming years, Salesforce expects synergy between its Einstein AI tools and Tableau applications, improving its sales margin, which, in turn, will accelerate the company’s EBITDA growth.
Also, it has been making many acquisitions to increase its market share. The table below provides information about Salesforce’s M&A deals for the last three years.
Table 1. Merger and Acquisitions
Salesforce’s growth will be supported by its notable partnerships with the tech giants. In July 2019, the company partnered with Chinese e-commerce behemoth Alibaba Group Holdings (BABA US) to expand its sales channel. Also, it has a strategic partnership with Google for data analytics and cloud computing. It is now planning to partner with IT services firms such as Accenture (ACN US) to add customers. Besides, Salesforce is actively implementing venture investing activities in many data science companies, including Zoom Video Communications (ZM US).
Table 2. Financial Performance Expectations (2020–2023)
As can be seen from the table above, analysts have high expectations regarding salesforce’s future growth. The revenue is projected to more than double from 13.282B in fiscal 2019 to 29.313B in FY 2023. EBIT is expected to triple from 2.265B to 7.863B, while adjusted EPS will rise 75% from 2.75 to 4.81 during the same period. We believe that the company’s plan of delivering synergies between the recent acquisitions and its technologies will be successful, and salesforce will beat the top line and the bottom line expectations.
Table 3. Equity Relative Valuation
Comparing Salesforce’s valuation to the industry average, we can see that the company is a bit overvalued, with its Blended Forward PE ratio of 52.6x, while the group average is 35.7x. However, its BF EV/EBITDA ratio has less divergence from the industry average, having the multiple of 24.7x to the group’s 20.7x. The valuation by the book shows that the company is even undervalued compared to its peers, the P/BV of 4.3x against the average of 5.0x.
Technical Analysis
Graph 4. Stock Price Action
The last uptrend in the stock price move of Salesforce.com, Inc was set off after the price broke the level of $80 at the beginning of 2017. The stock price had been increasing since then with minor fluctuations until it reached a peak of $161.19 on October 1, 2018. After that, the price saw a serious plunge of approximately 30% to low a $110 area and soon regained most of its losses. For the whole year of 2019, the price has been trading in a range between $140 and $160. Towards the end of the year, the price broken above the downward-sloping resistance and is trying to overtake the previous highs. Additionally, 50–100- and 200-day moving averages have flattened out during this period around the level of $150 and are acting as a support line for the stock to jump off of. Further price appreciation in the coming months and the break of the all-time high of $167.65 will send the stock to a new trend.
The Bottom Line
Cloud enterprise and application software market has been growing noticeably for the last several years and the trend will likely continue in the future. We believe that salesforce.com is well-positioned to take advantage of these growing opportunities. Its recent acquisition of Tableau should boost its top line and bottom line, as it is integrated with the Einstein AI. Also, we believe that MuleSoft will further increase its contribution in the total revenue, and the salesforce itself will continue to innovate to support its organic growth. Because of the factors we have stated above, along with many others, we have opened long position in the stock.
Disclosure
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Keywords: FinTech, Finance, Investment idea, salesforce.com, Inc, Stock market
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