Why We Remain Positive On Salesforce

by Trefis Team
+5.38%
Upside
96.48
Market
102
Trefis
CRM
Salesforce.com
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As of 2016, Salesforce (NYSE:CRM)  had the highest market share in CRM globally, with the next contender (Oracle) holding less than half of Salesforce’s market share. With an increased adoption of Salesforce’s product subscriptions over the years, and expectations further growth due to AI enhancements, we believe that the Salesforce stock is worth nearly $102, which is slightly ahead of the market price.

Key Factors Driving Our Investment Thesis

  1. Demand For Cloud-Based Software: Over the past few years, cloud adoption has gained pace, with companies looking for scalable, cost-effective and innovative solutions. Some large enterprises were initially reluctant to use cloud services due to data security concerns. However, cost considerations and improved security have led large enterprises to shed their existing on-premise deployments for leaner Software as a Service (SaaS) deployments that come without the hefty hardware costs. Moreover, with a SaaS deployment, an enterprise pays only for the services it uses. Going forward, we expect the number of SaaS deployments across business verticals to expand. Per Gartner, the SaaS market size is expected to double from 2016 and reach over $75 billion by 2020. This will directly benefit Salesforce, as it should be able to leverage its strong market position to capture a portion of that growth.
  2. Expansion Of AI-Based CRM Market: Salesforce’s market share in the CRM space has continued to grow at an impressive rate over the past few years, to just above 21% in 2016. While the overall CRM market has grown at a CAGR of nearly 13% since 2011, Salesforce’s cloud-based CRM revenues have grown at over 26%. With the rate at which Salesforce is growing, along with an attrition rate of less than 9%, we expect the company to capture a substantial portion of the overall market growth going forward. Salesforce will also likely have an advantage over its rivals, being the first company to offer AI enhancement (Einstein) in the CRM domain.
  3. Strategy Of Inorganic Growth: A declining bottom line over the years has not particularly bothered investors or the company’s management. Salesforce has remained acquisitive, and continues to acquire smaller technology startups in the Internet of Things (IOT), Artificial Intelligence, and e-commerce domains to enhance its product offerings. The company also bid to acquire LinkedIn and Twitter in the past few years. Though Salesforce did not succeed in acquiring either, the interest signals the company’s plans to diversify its offerings in order to drive growth over the long run. The company’s management has clearly indicated that it will continue to follow this strategy of inorganic growth to ensure long-term success. However, this could put the bottom line under further pressure in the near term. However, we expect the overall growth from these acquisitions to more than offset the expenses.

Potential Upside And Downside To Salesforce’s Valuation 

Per our estimates, Salesforce’s stock is worth around $102, implying a market cap of $70 billion. Below are the key drivers of Salesforce’s value that present opportunities for upside or downside to our price estimate for the company:

  • Salesforce’s Share In The CRM Market Could Reach 30%: Salesforce’s CRM market share has increased at a brisk pace, from around 10.6% in 2010 to around 21% in 2016, and we expect it to continue its upward trajectory, reaching around 25% by the end of our forecast period. We expect Salesforce to benefit from the fast growth in the cloud computing CRM market. There could be an upside of about 15% to our price estimate for Salesforce if its market share increases at a faster rate to cross 30% by the end of our forecast period. On the other hand, there would be a 5% downside to Salesforce’s valuation if its market share only reaches 23%.
  • EBITDA Margins Could Cross 21%: Salesforce’s margins have improved over the years, despite rising expenses, owing to the significant increase in its revenues. With the expectations of increased adoption over the years ahead, we expect the company’s operating expenses to decline as a percentage of revenue. Consequently, we expect the company’s EBITDA margins to increase to over 19% by the end of our forecast period. There could be an upside of about 10% to our price estimate for Salesforce if its margins improve at a faster rate to reach 21% by 2024.

Key Risks To Salesforce’s Valuation

Salesforce competes against large players such as Microsoft, Oracle and SAP, which have a diversified product base, longer operating histories, access to a wider customer base and significantly larger expenditure budgets. This puts some competitive pressure on the company. Moreover, with the evolving technology market and changing customer needs, the company has to continuously improve its offerings in order to maintain its lead in the market. Further, as the company remains acquisitive, there could be issues related to integrating acquired companies’ operations. Moreover, the company might not be able to extract the expected benefits from acquired entities. However, we do not believe this is a significant risk.

See our complete analysis for Salesforce

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