Should you buy Salesforce stock? Wall Street is more enthusiastic about smaller rivals Zendesk and HubSpot
Salesforce.com is one of the top names in cloud computing and also one of the top names MarketWatch readers are looking for news about.
This quarterly review of Salesforce stock shows comparisons between key metrics for the company and its competitors, as well as a summary of the top topics investors are watching right now.
Remember that no two companies are alike - even competitors do not compete in every area. Every investor needs to do their own research in order to make informed long-term decisions.
Where Salesforce fits
Salesforce.com Inc. CRM, + 0.57%, Founded in 1999, is one of the 50 largest publicly traded companies in the US, valued at more than $ 200 billion. It is also considered one of the first direct games of the cloud computing revolution as its enterprise software applications enable flexible and decentralized customer service, automated marketing, business analytics, and other services. The San Francisco-based company was listed -0.35% on the Dow Jones Industrial Average DJIA last year.
With so many companies appreciating this type of customer relationship management - the CRM that makes up the ticker symbol of Salesforce - there is a lot of potential for growth. Note that Salesforce's share has roughly tripled since mid-2017, and revenue has doubled since fiscal 2018 (which actually ended January 31, 2018 as the company follows a strange financial calendar).
And by and large, the future for this segment of enterprise software continues to look bright. According to Grandview Research, the global CRM market was valued at $ 43.7 billion in 2020 and is expected to grow at a double-digit annual rate through 2028.
Key metrics
A deeper look at Salesforce beyond these general trends reveals an interesting breakdown of its main segments. This includes the regular subscriptions to its enterprise software suite as the main category, but also a smaller division called “Professional Services and Other”. This secondary segment consists of contracts where Salesforce delivers more than just software through consulting processes and custom builds based on the needs of an individual organization.
From a top-line perspective, investors may not find this particularly interesting as the vast majority of the money comes from software subscriptions. In May, Salesforce released numbers for the first quarter for fiscal year 2022, in which subscriptions represented approximately 93% of total revenue. But both the growth rate and gross margins make these specific metrics worth exploring.
Sales growth
Investors should be encouraged by the brisk growth rates in the primary software subscription area as well as in the even faster growing professional services segment.
(Company registrations)
(Company registrations)
Sure, the service line still has a long way to go. But it may not be unreasonable to expect that customers who contract directly with Salesforce.com will get "sticky" when they receive the bespoke solutions they need - and after creating them with significant cost and labor, the likelihood of switching to a competitor is less likely to switch sometime soon.
And, to put it in a nutshell, Professional Services at Salesforce are not a loss-maker hoping to get the money back through software sales. This line of business has hit or near breakeven with sustained growth, which speaks for responsible management rather than simply viewing this segment as a glorified marketing expense that doesn't need to carry its own weight.
Pricing power and profitability
As the segment growth of Salesforce proves, there is a lot to see as an investor. But as with any tech megatrend, it's important to know that Salesforce.com is hardly alone in this market.
Adobe Inc. ADBE, + 0.40% is an example of a mature software developer who has invested heavily in this area for years and generally has great sales momentum. However, as most investors are likely to know, there are a variety of offerings this company has, including editing and design software, that may not be comparable to its CRM-related offerings.
(Fact set)
Among the smaller CRM companies are Zendesk Inc. ZEN, + 1.91% and HubSpot Inc. HUBS, + 1.89% almost exclusively customer service, marketing and CRM platforms, and this duo is experiencing impressive momentum. Salesforce isn't just enjoying the rising tide in this fast-growing sector.
The pricing power is rather mixed. Salesforce is in the middle with margins that are behind the giants Adobe and Oracle Corp. ORCL lie, + 0.81%. However, ZEN and HUB do not generate an operating profit because they invest heavily in future growth.
Free cash flow
In addition to profits and sales, many investors are interested in metrics for generating cash flow. In short, free cash flow is how much money a company generates after paying the cost of doing business. The value proposition of enterprise software stocks is that they can scale quickly without high marginal costs, and the larger CRM companies seem to be proving that theory.
(Fact set)
Salesforce ranks second after Adobe in free cash flow per share and second only to Oracle when it comes to total liquidity on its books, with an impressive $ 15 billion war chest.
The fact that cash flow per share has improved significantly year over year is a good sign that Salesforce.com isn't just looking for new customers at any cost, but rather continues to prioritize cash flow to increase shareholder value.
Stock valuation and performance
If you prefer not to prioritize cash flow and prefer to follow a more traditional valuation model, here are price / earnings (P / E) ratings for leading CRM stocks based on consensus earnings estimates for the next 12 months asked by FactSet analysts, along with the total return numbers through June 4th.
(Fact set)
Here is one area where investors should be cautious about Salesforce, as the stock trades at a premium over its larger competitors as measured by its future sales forecasts and future earnings forecasts. It's also not particularly encouraging that in 2021 and over the long term, the stock has lagged most of the other stocks on this list in terms of five-year returns.
Wall Street Street opinion
With all of this in mind, should you ... buy Salesforce stock? The official answer on Wall Street is unfortunately not clear. Here is a recap of the opinions of Wall Street analysts surveyed by FactSet:
(Fact set)
While 79% rate the stock as a buy or better, some Salesforce competitors have an even higher percentage of analysts in their corner. Additionally, while the potential upside is good based on a consensus target of 19%, it is half of the projected 38% growth for ZEN and Pegasystems Inc. PEGA, +1.84%.
These are estimates, of course, and there are no guarantees that either of these CRM providers will deliver. But the tepid reception is at least worth a mention before investing money in Salesforce stock - or any of its competitors.
Important data
the 10th of June - Salesforce's annual virtual general meeting
- With reporting by Philip van Doorn.
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