Salesforce - A Force to be reckoned with?

Salesforce, an American cloud computing company in the United States is the world’s largest Customer Relationship Management (CRM) platform and owns more than 20% of the market (see above picture).

During the past couple of years, the company managed to grow revenues by close to 25% each year.

Furthermore, during the last quarter the company continued to report very good results and provided a strong outlook.

What makes Salesforce a force to be reckoned with?

1) Huge market share

As mentioned, the company owns more than 20% of the CRM market share. With such big market share, Salesforce revenue was able to grow 27% to $3.3 billion year over year in Q2. Salesforce is  now well on its way to becoming the fastest enterprise software company to reach $20 billion in revenue.

Sales force was also voted the best CRM product for 5 straight years and the company now expects revenue to rise as much as 25% to $13.175 billion in fiscal 2019.

2) Diverse spectrum of revenues & Partnerships

The company’s stellar financial results came mostly from the subscription revenues which in turn are derived from multiple sources. The primary source is subscription fees received by the company from customers for accessing its enterprise cloud computing application service. The second source is subscription fees generated from customers for providing additional support beyond the standard support given by the company.

Geographically, in fiscal 2018, the Americas contributed approximately 72% of total revenue, Europe accounted for roughly 18%, while Asia Pacific contributed the remaining 10%.  This therefore means that Salesforce still generates only about 30% of total revenues from international operations, which is much lower than its rivals like Microsoft or Oracle composition of around 50%. Nonetheless, the company still managed to form partnerships with the likes of Amazon and Alphabet and more recently with Apple which will help to continue in expanding its international operations.

3) Tactical Acquisitions

Over the last two years, the company has closed a number of takeovers worth a combined deal value of over $4 billion. In fiscal 2017 alone, the company made as many as thirteen takeover deals. Additionally, the recent buy-out of MuleSoft, the company’s biggest ever acquisition is being considered as a major positive.

How is the company valued?

Salesforce is considered a growth stock and like its peers, the profits it makes are very minimal compared to the revenue. This is because the company focuses on future growth and development rather than short term profit. (See financials table below).

The current P/E of the stock is very high currently at 124 (vs 210 peers). Although this is extremely high compared to the norm, we need to take note that Tech companies normally have a high ratio due to the fact that their earnings are being depleted in favor of investing in research and development which therefore takes the Earnings number in the ratio down.

From a technical standpoint, during the past years the stock has been really bullish and the most interesting point is that it has not been very volatile with a performance similar to that of Apple. Interestingly enough, the two companies reached an agreement lately which again should improve salesforce valuations even more going forward.

 

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