The One Thing Missing in Salesforce’s Growth Plans

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Cloud computing behemoth Salesforce.com (NYSE:CRM) has been on a seemingly unstoppable growth streak quarter after quarter. We previously explored the reason behind Salesforce’s unabated growth, wherein we briefly touched upon the one chink in the company’s armor. In this report, we take a look at the single flaw in Salesforce’s growth strategy — its concentration in the Americas and limited overseas expansion. The company undoubtedly has an unassailable lead over traditional software companies like Oracle (NYSE:ORCL) and SAP SE (NYSE:SAP) in the cloud computing realm. However, by ignoring markets like Asia Pacific, Salesforce could not only let immense growth potential slip away, it may also forfeit market share gains in these untapped markets to its rivals.

Our price estimate of $65 for Salesforce.com is about 20% lower than its current market price.

See our complete analysis for Salesforce.com here

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Focus on Consolidation in Home Ground

Salesforce currently seems to be largely focused on solidifying its position in its home ground. It has an unassailable stronghold in the Customer Relationship Management (CRM) market. It is also quickly making its presence felt in new categories such as the Service, Marketing and Analytics Cloud. We have previously mentioned that Salesforce’s successful expansion into multiple product categories could be the driving factor behind its relentless growth. (Read: Here’s The Reason Behind Salesforce’s Unabated Growth)

However, the diversification in product categories has not extended to geographical markets. The company remains firmly rooted in North America with very limited operations in Europe, Asia Pacific and Japan. This is underscored by the fact that Salesforce derives nearly three-quarters of its revenues from the Americas (the company does not provide breakup of North America and Latin America Revenues). [1]

Salesforce has indeed expanded its presence in Europe by opening new data centers in the UK, France and Germany over the last year. Nonetheless, the expansion has so far not provided a boost to revenue growth in the region. In fact, top-line growth in the first nine months of fiscal 2015 slowed to 17% year on year, compared to 37% year on year growth in the prior year period. [1] On the other hand, expansion activity in the Asia Pacific region has remained muted since opening a second data center in Japan earlier this year. [2]

Salesforce’s strategy of focusing almost exclusively on its home ground is in contrast to rivals like Oracle, which is steadily expanding its presence in the emerging markets. Earlier this year, Oracle announced plans to significantly expand its sales team in the Asia Pacific region. (Read: Weekly Software Notes: Oracle) The company explicitly stated that a key purpose behind the expansion is to drive the growth and support demand for Oracle Cloud in the region. [3] It also has significant plans for China, which is a major albeit heavily regulated market. (Read: Can Oracle’s Expansion Plans in China Overcome Nationalistic Tendencies and Heavy Competition?) While Oracle is far behind Salesforce in terms of presence in cloud, the latter still stands the risk of losing out on the first mover’s advantage by ignoring overseas markets.

Wealth of Untapped Opportunities

The mature Asia Pacific region offers a wealth of untapped opportunities in the cloud computing market. The public cloud services market in the mature Asia Pacific (including Australia, Japan, New Zealand, Singapore and South Korea) and Japan is estimated to be worth $7.4 billion in 2015. It is forecast to expand at an annual clip of about 12% and reach $11.5 billion by 2018. [4] Further, a July 2015 study by the U.S. Department of Commerce named Japan, India and China among the top global markets for cloud computing. [5]

These facts clearly indicate the importance of the Asia Pacific region in the global cloud computing market. Salesforce may be able to grow at a strong annual clip of over 20% on the basis of product diversification. But for consistent long term growth, it needs to expand its horizon beyond the Americas and establish a foothold in these lucrative overseas markets also.

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Notes:
  1. Salesforce SEC Filings [] []
  2. Salesforce Continues to Increase Investments in Japan, Salesforce Investor Relations, December 3, 2014 []
  3. Oracle Plans to Significantly Expand Sales Teams Across Asia Pacific, Oracle Press Release, March 25, 2015 []
  4. Public Cloud Services In Mature Asia Pacific and Japan Forecast To Reach $7.4 Billion in 2015, Gartner, January 15, 2015 []
  5. 2015 Top Markets Report – Cloud Computing, U.S. Department of Commerce, July 2015 []