Risk/Reward Rating: Negative
Salesforce is a mature company and is dominant as the world’s #1 customer relationship management (CRM) platform evidenced by it use in over 150,000 companies. As CRM growth matures and slows, Salesforce has increasingly turned to acquisitions in recent years to maintain revenue growth. Replacing organic revenue growth with acquired revenue growth usually leads to a lower valuation multiple for a stock, particularly when acquisitions are made at high price multiples.
Valuation: 8.86x current year expected sales, 64x non-GAAP earnings estimates for the current year, 1,055x GAAP earnings estimates, and 50x estimated free cash flow.
The difference between GAAP and non-GAAP earnings is extreme and is driven by heavy use of stock-based compensation and the large amortization expense in writing down the goodwill portion of acquisitions. Each of these expense items is ignored in non-GAAP earnings estimates and lowers the quality of reported non-GAAP earnings.
The stock valuation is extreme by historical stock market standards which should limit upward price momentum going forward. The company expects operating cash flow to grow 12-13% in the current year which is not supportive of an extraordinary valuation multiple.
As organic growth slows, the primary risk to the stock becomes multiple contraction. As an example, Oracle trades at 16.5x earnings while producing 153% of Salesforce’s expected revenue. Oracle once traded at similar multiples to Salesforce and also turned to acquisitions to maintain growth. It is likely that Salesforce’s stock will face a similar challenge even as it continues to grow as the multiple contracts towards that of a fully mature software company (64x non-GAAP contracts towards the 20’s).
Technical support: $200 area
Technical resistance: $260 area near all-time highs
Salesforce 1-year daily chart
Price as of report date 6-17-21: $245
Salesforce Investor Relations Website: Salesforce Investor Relations