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Investment Overview for Salesforce.com (NYSE:CRM)
Below are key drivers of Salesforce.com's value that present opportunities for upside or downside to the current Trefis price estimate for Salesforce.com:
Cloud-based Customer Relationship Management (CRM) Software
- Salesforce Share in CRM Market: Salesforce.com CRM market share has increased at a brisk pace post the economic crash in 2008-09, from around 10.6% in 2010 to around 16.2% in 2013 and we expect it to continue to increase to reach to around 26% by the end of Trefis forecast period. We believe that Salesforce.com will benefit from the fast growth of cloud computing CRM market. The favorable factors for this tremendous growth are speed and ease of implementation and low total cost of ownership. There could be an upside of about 18% to our estimate for Salesforce.com stock if its market share increases at a faster rate to reach 30% by the end of Trefis forecast period. On the other hand, there could be a downside of approximately 19% to our estimate for Salesforce.com stock if Salesforce's market share grows slower than forecast to reach 20% by the end of Trefis forecast period.
Cloud Software Revenue
- Salesforce's Share in the Cloud Software market: The overall cloud-based software market is expected to grow at a fast rate. Salesforce.com continues to grow in this market organically, as well as through the acquisition route. It has launched a series of new cloud-based software applications like Chatter, Database.com, Data.com, Do.com, Desk.com, Heroku. It also generates revenues from its application platform Force.com and marketplace AppExchange. At the end of fiscal 2013, Salesforce has a current market share of approximately 0.33% in the cloud services market, and we expect this share to double by the end of our review period. There could be an upside of 24% to our estimate for Salesforce.com stock if its market share grows at a faster pace and reaches 2% by 2020. However, we believe Salesforce needs to pursue an inorganic growth strategy to be able to gain its market share at this pace. On the flipside, our price estimate could see a 5% downside if market share for Salesforce in the cloud services market grows slower than our forecast to reach 0.5% by the end of our review period.
For additional details, select a driver above or select a division from the interactive Trefis split for Salesforce.com at the top of the page.
Salesforce.com offers customer relationship management (CRM) software, including sales and customer service software, as well as other cloud-based application, database and platform software to businesses. CRM software helps companies better manage customer data and information, which helps those companies to better serve their customers and increase sales. Salesforce.com's software is delivered remotely to its customers over the internet (from the "cloud"), making Salesforce.com one of the leading companies in the cloud-software space.
Cloud-based CRM software
Salesforce.com uses cloud-based software to give its customers access to online software, with minor implementation and no on-premise installation or maintenance of software or physical servers.
Salesforce.com makes money mainly through subscription and support fees associated with its customers using Salesforce's applications. These applications give Salesforce.com's customers access to systems which can systematically record, store, and act upon business data. These applications are used to optimize different aspects of a company's business including sales, marketing, partnerships and customer service. The company’s CRM services primarily focus on sales-force automation, marketing automation, and customer service and support automation. In addition, it provides consulting and implementation services and training.
Salesforce.com is heavily invested in cloud-based application services and derived around 94% of its fiscal 2014 revenue from subscription and support fees associated with cloud services.
Salesforce.com has experienced a significant rise in customers in the last couple of years. Its customers are relatively evenly split across small business (fewer than 200 employees), medium sized businesses (200 employees, <$1 billion in revenue) and large businesses (greater than $1 billion in revenues). This higher proportion of SMB businesses presents Salesforce with significant risk of a decline in renewals. Additionally, enterprise customers tend to be stickier with their IT services, which reduces Salesforce's sales & marketing expenses and decreases the pressure on its margins.
Other cloud based software
In addition to cloud-based CRM software, Salesforce has a long-term opportunity to deliver other types of cloud-based software and services as corporate IT departments leverage cloud-based software instead of investing in additional hardware and on-premise software. The cloud computing market consists of Software as a service (SaaS), Platform as a service (PaaS) and Infrastructure as a service (IaaS).
Salesforce.com offers Force.com, which is the application development development platform for corporates' IT departments and independent developers. It also offers AppExchange, which is an online directory that provides customers a way to browse, test-drive, share and install applications developed on Force.com platform.
It has also launched a series of other cloud based applications and services, including Chatter, an enterprise social network; Database.com, a cloud-based database offering; Data.com, a leads platform for sales professionals; Desk.com, a social customer support service, and Heroku, a Ruby application platform. It also launched the Radian6 Social Marketing cloud recently. In 2013, Salesforce acquired ExactTarget, a cloud-based digital marketing company, for $2.5 billion. With ExactTarget, Salesforce intends to transform into a complete cloud based company that caters to every industry involving a customer.
Cloud-Based Customer Software is Salesforce.com's core and most valuable business. The division's value depends heavily on three main factors:
1. Growth in the Size of the CRM Software Market
The CRM software market consists of two types of software: (1) On-Premise Software, (2) On-Demand (Cloud-Based) Software.
- On-Premise Software is the traditional enterprise software model, which requires each customer to install, configure, manage and maintain the software on their in-house hardware.
On-Demand (Cloud-Based) Software is delivered remotely over the Internet on an as-needed basis with little or no implementation services required and without the need to install and manage third-party software in-house.
The overall CRM market has nearly doubled between 2008 - 2012, from $9.15 billion in 2008 to around $18.09 billion in 2012. The global Customer Relationship Management (CRM) market expanded 15% in 2013 to cross $20 billion. We expect this market to keep growing at double digit pace till the end of our review period.
2. Salesforce.com's Growing Share in the CRM Software Market
Salesforce.com has been increasing its share in the CRM market at a consistent rate for the last few years. During the recessionary period between 2008-10, Salesforce was able to maintain its market share at around 10.5% despite the challenging IT environment. Subsequently, it's market share has increased from 10.6% in 2010 to about 16.2% in 2013. This growth is attributable in large part to the shift from on-premise CRM software to cloud-based CRM software globally from IT enterprises which benefits Salesforce.com. Going forward, we expect Salesforce to continue with its strategy of investing heavily into sales & marketing and R&D activities to support a strong, double digit top line growth rate.
3. Cloud-based software suites that complement its CRM offering
Salesforce's additional offerings comprising of development tools and data management suites provide a holistic product portfolio for small business and should complement the company's strong top line growth rate in the future.
On-going Shift to Software-as-a-Service (SaaS)
Software as a Service (SaaS) is a subscription-based service where companies can access software online and pay only for the functionality utilized. This is oftentimes a cost effective solution for companies, and suits small and medium enterprises more, as they have low IT budgets. In this model the software is generally hosted on the service provider's servers from where it can be easily accessed by users. As such, businesses can save heavily on costs and time involved with purchase and implementation of expensive software. We forecast an increasing trend towards "Software as a Service" adoption.
Corporate Confidence in Data Security for Software-as-a-Service Applications Important
Large enterprises are sometimes reluctant to use cloud services over data security concerns. Since data in cloud-based software resides outside the company, the company must have confidence in the security of the data and the reliability of the data storage. For example, according to GTRA research, 75% of large companies feared cloud computing security breaches. However, continued weakness in the global macroeconomic environment throughout 2013 is forcing large enterprises to shed their existing on-premise deployments for leaner SaaS deployments that come without any hefty hardware costs. Going forward, we expect the number of SaaS deployments across business verticals to expand.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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