Salesforce.com Inc (CRM): An Assessment of This Software Stock

Despite the uncertain macroeconomic environment, Salesforce, Inc. (CRM) reported a strong second quarter, with its sales and earnings coming higher than analyst estimates. The company also provided optimistic guidance.

In this piece, I have discussed several reasons why it could be wise to buy the stock now.

CRM topped analyst EPS and revenue estimates in the second quarter. Its EPS was 11.4% above the consensus estimate, while its revenue beat analyst estimates by 0.9%. CRM’s CEO Marc Benioff said, “Our transformation drove strong second quarter results, delivering revenue of $8.6 billion and record GAAP and non-GAAP operating margins.”

CRM’s President and CFO Amy Weaver said, “We continue to execute against our profitable growth framework, delivering 17.2% GAAP operating margin and 31.6% non-GAAP operating margin – exceeding our target three quarters early. We are accelerating our transformation and continue to drive strong shareholder value.”

For the third quarter, the enterprise software maker has forecasted its revenue to grow approximately 11% year-over-year to come between $8.70 billion and $8.72 billion. Its non-GAAP EPS is expected to come between $2.05 and $2.06.

For fiscal 2024, the company guided revenue to come between $34.70 billion and $34.80 billion. Its non-GAAP operating margin is expected to be approximately 30%. Similarly, its non-GAAP EPS is expected to come between $8.04 and $8.06. The company’s operating cash flow is expected to grow between 22% and 23% year-over-year.

On September 12, 2023, CRM announced the Einstein 1 Platform at its flagship annual conference, Dreamforce. It has been built on Salesforce’s underlying metadata framework. It features major advances in Salesforce Data Cloud and Einstein AI capabilities. The Einstein 1 platform will allow companies to safely connect any data to build AI-powered apps with low code and deliver new CRM experiences.

Parker Harris, Co-founder and CTO of CRM said, “We pioneered the metadata framework nearly 25 years ago to seamlessly bridge data across applications. It’s the connective tissue that fuels innovation. Now, with Data Cloud and Einstein AI native on the Einstein 1 Platform, companies can easily create AI-powered apps and workflows that supercharge productivity, reduce costs, and deliver amazing customer experiences.”

The company also revealed the Einstein Copilot at the conference. The Einstein Copilot is its generative AI conversational assistant. It relies on Salesforce’s Data Cloud to engage in natural language conversations with users and deliver answers.

Due to these positive developments, CEO Benioff said, “Based on our performance and what we see in the back half of the year, we’re raising our fiscal year ‘24 revenue, operating margin, and operating cash flow growth guidance. As the #1 AI CRM, with industry-leading clouds, Einstein, Data Cloud, Mulesoft, Slack, and Tableau, all integrated on one trusted, unified platform, we’re leading our customers into the new AI era.”

Earlier this year, the company announced cutting down 10% of its workforce and reducing some office space to become more profitable. However, the company is now hiring 3,300 people across different departments. The new hires will join the sales and engineering teams and work on its data cloud product.

The stock has gained 65.9% in price over the past nine months and 60.7% year-to-date to close the last trading session at $213.03. Wall Street analysts expect the stock to hit $253.91 in the next 12 months, indicating a potential upside of 19.2%.

Here’s what could influence CRM’s performance in the upcoming months:

Robust Financials

For the fiscal second quarter ended July 31, 2023, CRM’s total revenues increased 11.4% year-over-year to $8.60 billion. Its net cash provided by operating activities increased 141.9% over the prior-year quarter to $808 million. The company’s non-GAAP net income rose 76% year-over-year to $2.09 billion. In addition, its non-GAAP EPS came in at $2.12, representing an increase of 78.2% year-over-year.

Favorable Analyst Estimates

CRM’s EPS for fiscal 2024 and 2025 are expected to increase 53.1% and 16.8% year-over-year to $8.02 and $9.37. Its revenue for fiscal 2024 and 2025 is expected to rise 10.9% and 11% year-over-year to $34.78 billion and $38.58 billion.

Its EPS and revenue for the quarter ending October 31, 2023, are expected to increase 46% and 11.2% year-over-year to $2.04 and $8.72 billion, respectively.

Strong Historical Growth

CRM’s revenue has grown at a 19.5% CAGR over the past three years and a 22.8% CAGR over the past five years. Its EBITDA has grown at a 40.5% CAGR over the past three years. Its total assets and levered FCF have grown at 17% and 21.4% CAGRs over the same period.

Mixed Valuation

In terms of forward non-GAAP P/E, CRM’s 26.55x is 18.6% higher than the 22.39x industry average. Likewise, its 17.39x forward EV/EBITDA is 22.9% higher than the 14.15x industry average.

However, its 3.40x forward P/B is 11.2% lower than the 3.82x industry average. Its 1.05x forward non-GAAP PEG is 40.8% lower than the 1.77x industry average.

High Profitability

In terms of the trailing-12-month gross profit margin, CRM’s 74.52% is 52.7% higher than the 48.82% industry average. Likewise, its 23.30% trailing-12-month EBITDA margin is 154.6% higher than the industry average of 9.15%. Furthermore, the stock’s 31.95% trailing-12-month levered FCF margin is 343.5% higher than the industry average of 7.20%.

POWR Ratings Show Promise

CRM has an overall rating of A, equating to a Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. CRM has a B grade for Quality, consistent with its high profitability. It has an A grade for Growth, in sync with its strong historical growth.

Its favorable analyst estimates justify its A grade for Sentiment.

CRM is ranked #6 out of 133 stocks in the Software - Application industry. Click here to access CRM’s Value, Momentum, and Stability ratings.

Bottom Line

For the first time in seven years, CRM announced that it was raising the prices of its software products starting in August. This is expected to boost the company’s revenues and help it overcome the downturn in tech spending. Moreover, at its recently concluded annual conference, the company announced several new AI-focused products, which will likely drive its growth in the long term.

Given its robust financials, solid historical growth, favorable analyst estimates, and high profitability, it could be wise to buy the stock now.

How Does Salesforce, Inc. (CRM) Stack Up Against Its Peers?

While CRM has an overall grade of A, equating to a Strong Buy rating, you may also check out these other stocks within the Software – Application industry, eGain Corporation (EGAN), Commvault Systems, Inc. (CVLT), and TeamViewer SE (TMVWY), with an A (Strong Buy) rating. For exploring more A and B-rated software stocks, click here.

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CRM shares were trading at $208.79 per share on Thursday afternoon, down $4.24 (-1.99%). Year-to-date, CRM has gained 57.47%, versus a 14.75% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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