Salesforce.com’s Stock Over IBM?

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We think that Salesforce.com’s stock (NYSE: CRM) currently is a better pick compared to IBM’s stock (NYSE: IBM). Salesforce.com’s stock trades at about 11.6x trailing revenues, compared to around 1.7x for IBM. Does this gap in the companies’ valuations make sense? We believe so. Salesforce.com has seen better revenue growth over the last three years while IBM’s revenues have fallen. With respect to operating margins both companies saw a fall over the last three years with Salesforce.com seeing a smaller fall. However, there is more to the comparison, which makes Salesforce.com a better bet than IBM at these valuations. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating income and operating margin growth. Our dashboard Salesforce.com vs International Business Machines: Industry Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.

1. Salesforce.com Clear Winner On Revenue Growth

With Salesforce.com’s fiscal year ending in January, its ongoing FY is 2022 while IBM’s is 2021. If compared on the basis of the past three years, Salesforce.com trumps IBM in revenue growth. Salesforce.com’s revenue was recorded at $23.5 billion in the last twelve months period compared to $13.3 billion in FY 2019 (a jump of 76%). On a comparable basis, IBM’s revenue was recorded at $73.8 billion in the last twelve months period compared to $79.6 billion in FY 2018 (a fall of 7%). Further, for the most recent quarter (Q2’22 for Salesforce.com and Q2’21 for IBM), Salesforce.com’s revenues jumped 23% YoY, while IBM’s grew by 0.9%.

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Due to the faster revenue growth of Salesforce.com it holds an advantage over IBM which has seen a revenue decline in recent years. This makes Salesforce.com’s revenue growth impressive and hence makes it a better bet.

2. Salesforce.com Edges out On Margins

Salesforce.com’s operating margin was 4.4% in the last twelve month period compared to 9.3% for IBM but over the last three years operating margin for Salesforce.com has fallen by 1.5% compared to a 7.1% fall by IBM. While the dent in Salesforce.com’s margins has been offset by the revenue growth, IBM on the other hand, has seen a fall in revenues and margins.

Risk

Salesforce.com has a better debt position, with debt as % of equity of 4.2% vs 45.4% for IBM. Salesforce.com has more cash cushion, with cash as % of assets of 10.9% vs 8.9% for IBM.

The Net of It All

While Salesforce.com’s trailing revenue multiple stands higher than that of IBM, it has seen stellar growth in revenues over the last three years and a lower fall in operating margins compared to IBM in the same period. Looking at the post-Covid recovery, overall Salesforce.com has fared better than IBM. Over the last twelve months Salesforce.com revenue growth was at 21% while IBM’s revenue fell by 3.6%. Hence we believe Salesforce.com has the potential to keep riding ahead, supported by strong financials and the gap in valuation could further widen over time. As such, we believe that Salesforce.com is currently a better buying opportunity compared to IBM stock.

While CRM stock is likely to move higher in the near term, there are several peers in its sector that look like a Better Bet Than CRM Stock. Also, Salesforce.com Peer Comparisons summarizes how the company fares against peers on metrics that matter.

 

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