CRM: Is Salesforce Stock a Buy Right Now?

One of the top performers on the S&P 500, shares of Salesforce.com have built massive wealth for long-term investors. CRM stock went public in 2004 and has since derived over 5,600% in cumulative returns. Comparatively, the S&P 500 is up 421% in this period. Salesforce stock has returned 34.3% in the last 12-months and is up 75% in the last five years. Comparatively, the S&P 500 has surged close to 37% since June 2020 and returned over 60% in the last five years.

While CRM stock has consistently outperformed the broader index, is it still a top bet for long-term investors?

Salesforce.com provides cloud-based enterprise solutions

Salesforce.com develops enterprise-facing cloud computing solutions with a focus on customer relationship management (NYSE: CRM). Its Sales Cloud stores data, monitors leads and progress, forecasts opportunities, and provides insights through analytics while delivering quotes, contracts, and invoices.

The company’s Service Cloud enables companies to deliver personalized customer service and support that allows enterprises to connect agents, dispatchers, and mobile employees through a centralized platform. Its Marketing Cloud allows enterprises to improve engagement, conversion, revenue, and loyalty from their customers. Salesforce.com also provides a Customer 360 Platform that offers tools for building, securing, and managing business applications.

In the first quarter of fiscal 2022, Salesforce increased revenue by 23% year over year to $5.96 billion, beating Wall Street estimates by $70 million. Adjusted earnings per share stood at $1.21 and rose 73% year over year and were $0.33 higher than consensus estimates.

In Q4, the company’s Sales segment grew revenue by 11% while its Service revenue was up 20%. Comparatively, growth rates for its Platform & Other and Marketing & Commerce businesses grew 28% and 25% respectively year over year.

What next for CRM stock?

The company’s current remaining performance obligation (CRPO) which measures expected future revenue from current contracts in the next year rose 23% to $17.8 billion, which shows the company should achieve another year of robust growth. Salesforce has forecast fiscal 2022 sales at $26 billion which would indicate a year-over-year growth of 22%. The company remains optimistic about generating $50 billion in annual sales by 2026.

In Q1, Salesforce reported an operating cash flow of $3.2 billion which was an increase of 76% year over year. Comparatively, free cash flow almost doubled to $3.1 billion. The company confirmed its cash flows experience a spike in Q1 and Q4 of each fiscal year as it receives a majority of annual fees in these periods.

CRM ended the quarter with cash and marketable securities of $15 billion, an increase of 53%, allowing it to fund future acquisitions and other investments. It also expects to complete the acquisition of Slack in the current fiscal quarter which was valued at $27.7 billion.

Once the acquisition is complete Salesforce will benefit from an increase in its customer base. The integration of the two platforms will enhance Salesforce’s Customer 360 platform in terms of digitizing user experiences.

Valuation and more

Salesforce enjoys a market-leading position in the global customer relationship management space with a share of around 20%. This allows the company to benefit from pricing powers as well as economies of scale. In Q1, its adjusted operating margin rose over 700 basis points to 20.2%. In fiscal 2022, the company expects the operating margin to improve by 30 basis points to 8%.

The acquisition of Slack will pose near-term declines in the company’s bottom line. Salesforce expects adjusted earnings to decline by 23% year over year in 2022. It means CRM stock is trading at a forward price to earnings multiple of 64.3x. However, its earnings are forecast to improve once the integration is complete.

Salesforce is a company that is reasonably valued and is well poised to deliver double-digit revenue growth in the next few years, making it a solid bet for CY 2021 and beyond.

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