75% Growth Expected from this CRM

📈 Trade Details

Considering a straight stock purchase of $CRM at $288.33 (the price at the time of writing). 

🎯 What do we expect?

If the expected earnings growth materializes, the expected return is 75.97% by 2027 or 28.20% annualized. This gives us a solid margin of safety to work with.

🗒️ Quick Company Summary

NASDAQ Ticker: CRM

Salesforce, Inc. provides customer relationship management (CRM) technology that connects companies with their customers globally. Its Customer 360 platform enables businesses to deliver connected experiences through various service offerings.

💰How does the company make money?

Subscription Fees: The majority of Salesforce's revenue comes from subscription fees for its various products and services. Customers pay for access to the software on a recurring basis, which provides a steady stream of income.

Professional Services: Salesforce also earns revenue from consulting and implementation services that help customers effectively use their software.

Add-On Products: The company offers additional products and features that customers can purchase to enhance their CRM capabilities, contributing to overall revenue.

Partnerships and Ecosystem: Salesforce has a robust ecosystem of partners that build applications on its platform, generating additional revenue through app marketplace sales.

Data and Analytics Services: Through products like Tableau, Salesforce provides analytics and business intelligence services, which are also monetized.

Here is the revenue data for Salesforce, Inc. ($CRM) over the last five years:

🔥 What’s trending in the news right now?

1. Starboard Value's Jeff Smith says Salesforce has 'a lot more to go' and can get more profitable

   Published Date: October 22, 2024

   Summary: Salesforce has become more profitable after Starboard Value and other activists invested in the technology stock. Jeff Smith, CEO of Starboard, believes the company can become more efficient with its spending on sales and marketing.

   Source: CNBC

2. Salesforce Stock May Pop With Share Of $31 Billion AI Agent Market

   Published Date: October 22, 2024

   Summary: The article discusses how generative AI is evolving beyond chatbots to include agentic AI, which can perform various tasks. This shift could positively impact Salesforce's stock.

   Source: Forbes

🎯 What analysts think (Stock Price Forecast in 1 YR):

Avg. Price: $314.59 (+9.11%)
Lowest Price: $236 (+8%)

Historically, the stock has traded below analyst targets, but the company consistently beats analyst expectations:

🎯 What do financial models think:

Avg. Price: 340.91 (+18.2%)

Breakdown by Model:

• PS Multiples: $298.10 (3.39%)

• P/E Multiples: $302.42 (4.89%)

• PB Multiples: $345.58 (19.86%)

• EBITDA Multiples: $372.57 (29.22%)

• EBIT Multiples: $370.94 (28.65%)

• Revenue Multiples: $283.87 (-1.54%)

• 5Y DCF Revenue Exit: $319.58 (10.84%)

• 10Y DCF Revenue Exit: $313.44 (8.72%)

• 10Y DCF Growth Exit: $393.52 (36.47%)

• 5Y DCF EBITDA Exit: $394.05 (36.64%)

• 10Y DCF EBITDA Exit: $375.93 (30.43%)

• Dividends: Multi-Stage: $320.93 (11.31%)

🕰️ Historical Performance vs. S&P500 ($10k Investment)

Here is the summary of your returns if you invested $10,000 in CRM vs. S&P 500 since 2021. 

CRM grew earnings at a rate of roughly 20% a year, while the average for SPY is 14%, yet the stock has underperformed. Salesforce transitioned into a mature, boring software business in the eyes of the market while still delivering above-market earnings growth. However, Salesforce's average growth hasn’t been smooth, with very large fluctuations year to year that had the market react negatively.

🔮 Future Earnings Expectations

Analysts expect earnings to pick up over the next 4 quarters.

🚚 Key Drivers of Future Growth

1. Agentforce Platform: The introduction of the Agentforce platform is a significant focus. This platform aims to automate various business processes across sales, service, marketing, and more, enhancing productivity and customer engagement.

2. AI Integration: Salesforce is leveraging its decade of experience in AI to create autonomous agents that can handle customer inquiries and tasks with minimal human input. This capability is expected to drive efficiency and improve customer satisfaction.

3. Data Cloud Utilization: The Data Cloud is positioned as a foundational element for AI and agent capabilities. It allows for better data integration and management, which enhances the performance of AI-driven solutions.

4. Multi-Cloud Strategy: Salesforce continues to see strong growth in multi-cloud deals, which accounted for a significant portion of new business. This strategy allows customers to utilize multiple Salesforce products, driving revenue growth.

5. International Expansion: Management noted strong growth in international markets, particularly in Japan, India, and Canada, which presents additional opportunities for revenue growth.

6. Customer Success Stories: The call included examples of existing customers successfully implementing Agentforce, leading to increased efficiency and customer satisfaction. This reinforces Salesforce's value proposition.

7. Operational Excellence: Salesforce is committed to maintaining operational excellence and improving margins. The company reported a non-GAAP operating margin of 33.7%, reflecting its focus on profitability.

🐂 Key Bullish Arguments

1. Robust Financial Performance: Salesforce reported an 8% revenue growth and a 15.5% increase in non-GAAP operating income for Q2 FY2025, demonstrating its ability to exceed expectations even in challenging economic conditions.

2. AI Integration: The company is positioned as a leader in AI-powered enterprise solutions with initiatives like Agentforce and Einstein Copilot, which are expected to drive significant future growth.

3. International Expansion: Salesforce is actively expanding its international presence, which is anticipated to contribute to overall revenue growth.

4. Strong Market Position: Despite some analyst downgrades, the company's strategic focus on AI and its solid financial health support a medium-term target price of $311 per share.

5. Improving Profitability: The company is committed to improving profitability through constant re-engineering and pricing initiatives, leading to an improved EBIT margin of 33.7%.

6. Positive Cash Flow: Salesforce's operating cash flow increased by 10% YoY to $892 million

7. Growth Potential in the AI Market: The overall enterprise AI market is projected to grow at a CAGR of 44.1% over the next decade, providing a favourable backdrop for Salesforce's AI initiatives.

8. Market Underestimation: The market may be underestimating Salesforce's growth prospects, projecting only an 8.5% long-term growth in EPS, which the analyst believes is conservative given the company's actual growth rates and margin expansion.

9. Valuation Improvement: Salesforce's valuation has improved significantly, with a PEG ratio of 0.20x compared to the industry average of 0.97x, suggesting that the stock is undervalued relative to its growth potential.

🐻 Key Bearish Arguments

1. Analyst Downgrades: Approximately one-third of analysts have lowered their forecasts for Salesforce's next quarter (Q3 FY2025), indicating a cautious outlook on the company's performance.

2. Slowing Revenue Growth: The company's remaining performance obligation (RPO), which predicts future revenues, has shown a slowdown in growth from 12% last year to 10% this year, with further expected decline to 9% in the upcoming quarter. This trend raises concerns about the sales pipeline and future revenue prospects.

3. Delayed Financial Benefits from AI: While Salesforce is aggressively marketing itself as an AI-enabled enterprise platform provider, significant monetary benefits from AI initiatives are not expected until FY2027. This long-term outlook may test investor patience if growth projections are not realized sooner.

4. Evolving AI Landscape: The rapidly changing nature of AI technology means that Salesforce must continuously adapt. Any missed or delayed adoption of AI products could hinder revenue and profit improvements.

5. Management Transition Risks: The departure of CFO Amy Weaver, who played a crucial role in Salesforce's financial success, introduces uncertainty. The ongoing search for a new CFO could impact investor confidence and the company's strategic direction.

6. Market Valuation Concerns: Despite recent improvements in valuation, there are still concerns that the current price target may not meet the expectations of aggressive investors, potentially limiting upside.

7. Cautious Market Sentiment: The market's reticent view of Salesforce's prospects, particularly regarding its RPO growth, suggests that analysts are skeptical about the company's ability to deliver on long-term growth targets.

Risks Highlighted by Management in the latest Earnings Call:

Summary Table of Key Risks

Conclusion

AI is all the hype and, in many cases, unjustified. This is coming to you from an AI startup :) but there are industries where the potential for improving the product with “AI” or plain automation can generate a lot of value. Salesforce is a great example. I am a daily Salesforce user and can’t wait for Agents to automate seemingly simple tasks: update records, reorganize accounts, integrate better with our email marketing workflows and so on. I welcomed the recent price increase and the company’s dedication to reduce bloat and focus on improving profitability. The market overall is cautious with expectations, and CRM has been surprising quarter after quarter. CRM is so widely integrated into sales ecosystems that even if they are late to AI, once they achieve a meaningful level of automation. Here is what Marc Benioff had to say about the pricing of AI Agents: The pricing model for these AI agents would likely be based on consumption. Specifically, he mentioned a charge of approximately $2 per conversation, suggesting a shift from traditional seat-based pricing to a model that reflects the usage of AI capabilities. This might require patience but I am bullish at current price.

Disclaimer
I currently do not have an active position in any of the companies mentioned above, but I am thinking of initializing in the next few days. As usual, the information provided in this newsletter is for general informational purposes only. All information in the newsletter is provided in good faith. However, we make no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability, or completeness of any information. The content of this newsletter does not constitute financial advice, investment advice, or any other type of advice and should not be relied upon for any individual circumstances. We are not financial advisors, and you should consult with a professional before making any investment decisions. Any action you take upon the information in this newsletter is strictly at your own risk, and we will not be liable for any losses and/or damages in connection with the use of our newsletter.

Happy Investing,
Andy