How Much Do Changes In Salesforce’s CRM Market Share Impact Its Value?
Building on its strong growth momentum over the last few years, Salesforce (NYSE:CRM) reported record revenue ($7.6 billion,+25% year-over-year) for the first three quarters of the year and expects to generate nearly $2.8 billion in the last quarter. Innovation and solid execution has enabled Salesforce to grow faster than the market, expanding its presence and gaining share. As demand for cloud solutions and integrated end-to-end CRM solutions with AI support grows globally, and the company continues to expand its customer base, Salesforce’s growth momentum is likely to continue in the near future. When looking at Salesforce’s stock, it is important to understand how changes in market share can impact the company’s share price. We have created an interactive model that details how changes in market share in the CRM market can impact Salesforce’s market price. You can modify assumptions to see how the dynamics of market share/market price sensitivity change.
Our price estimate for Salesforce stock stands at $102, which is slightly below the market price.
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Potential Upside And Downside To Salesforce’s Valuation
Salesforce’s CRM market share has increased at a brisk pace, from 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 forecast period. We expect Salesforce to benefit from the fast growth in the cloud-based CRM market. There could be an upside of about 10% to our revenue estimate for Salesforce if its market share increases at a faster rate to reach 29% 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%.
- 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 just pays for the services it uses. Going forward, we expect the number of SaaS deployments across business verticals to expand. Per Gartner, the total SaaS market 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.
- 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.
- 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 reportedly had interest in acquiring LinkedIn and Twitter over 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. While this could put the bottom line under further pressure in the near term, the overall growth from acquisitions should more than offset the expenses.