How Sensitive is Salesforce’s Stock to Sales & Marketing Expenses?

Salesforce (NYSE:CRM) has witnessed tremendous growth over the past few years, with revenues rising over 20% year on year. The company has witnessed a surge in its customer base and has successfully closed four nine figure deals in the past nine months. The company recently added Amazon, Citi group, PNC Financial Services, Cellcom, PostNord, TNT, AXA and Nestle to its ever-increasing customer base.

The rise in Salesforce’s customer base (and subsequently its revenues) has been largely due to its investments in sales & marketing (S&M), which have increased significantly over the past three years. Sales & marketing expenses now account for around two-thirds of the company’s total operating expenses, and these expenses have weighed on the company’s margins.

Salesforce has tried to keep its S&M expenses in check in order to improve profitability. Due to its impressive revenue growth, the company’s S&M expenses as a percentage of gross profit have declined from 53% in 2013 to 51% in 2015. Additionally, in the first three quarters of the current fiscal year, the company’s S&M expenses increased the least among its operating expenses. Going forward, we expect the expenses as a percentage of gross profits to decline further.

However, if Salesforce’s intends to expand further into the Asian and European markets, both of which provide significant revenue opportunities, it would require significant sales and marketing spending. This could lead to a slight downside to our price estimate for Salesforce’s stock.

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