This article is proudly sponsored by the Business Ethics Team at the University of Texas at Austin!
About Salesforce
Customer. Relationship. Management.
That is quite literally what CRM stands for.
In a world that is becoming exponentially more and more digitized, whether it is the meteoric rise of e-commerce or the increasingly greater importance of keeping customers satisfied in a quick and easy manner so as to keep them coming back, maintaining a rather intimate relationship with respect to their orders, needs, requests, feedback and other hopes and dreams is arguably more important than ever as the world is moving faster and businesses across the board are becoming more competitive.
San Francisco, California-headquartered Salesforce is at the heart of all of these tenants and then some.
Essentially anything and everything one wants to know about their respective customer or client can be logged in on, saved, managed and referred back to and likely most importantly, leveraged in a positive way that could lead to more data and subsequently more sales for any given business or organization, which is all done through the Cloud that Salesforce has developed over the years.
It is also worth briefly noting that Salesforce is not just Salesforce in and of itself, really, but is rather the product of a variety of previous strategic acquisitions including that of a famed professional messaging platform that it paid nearly $28 billion for, Slack, data software specialist Tableau for around $15 billion, Quip, MuleSoft, Acumen Solutions, Vlocity, Demandware and many other companies that have also contributed to what Salesforce has morphed into today; a CRM giant.
At the end of the day, it is a company that gathers vast amounts of data and, from our perspective, at least, turns it into action items that can accelerate the organic growth, revenues and (hopefully) the profits of a business or perhaps the amount of donations received by a nonprofit entity.
We think an example is in order.
Let’s say I run a candle shop out of my residence in Austin, Texas and let’s also say that, like many other small businesses, most of the customers I tend to order through my website.
If I wanted to better grow my business and cater more towards my current customer base as well as appeal to new customers, it might serve me well to have a subscription (yes, Salesforce does employ a software as a service or SaaS subscription-based model) to Salesforce’s CRM platform so as to determine how I can best reach, interact with and cash in on both my current and prospective clients.
Aside from my fictitious candle side hustle, many companies, small and large, use Salesforce, which is some form of instant validation, from our perspective, in that once they begin using it and start seeing results, they don’t seem to want to operate without it ever again.
Companies such as Ford, L’Oreal, Formula 1, Schneider Electric, Uber Eats, MillerKnoll, International Business Machines (IBM), T-Mobile, Casey’s, American Water, Kellogg’s, McKesson, PayPal, Walmart and many, many other companies and organizations that seemingly trust and enjoy using the plethora of tools supplied by the Salesforce ecosystem and its extensive platforms and capabilities within.
Of course, with all of this recent talk surrounding artificial intelligence (AI), it would be sort of crazy at this point if a SaaS player such as Salesforce wasn’t attempting to stay ahead of its competition through utilizing AI within its operations and the fortress it has developed in the Cloud.
With all of this being said, one of the last things we think that is worth noting is whether or not it is our opinion that Salesforce and its operations are largely resistant to recessionary pressures or not.
While it is somewhat difficult to definitively say without delving into the company’s core financials, we would initially assume that it is becoming more and more resistant and firm against recession-related pressures given the relative stickiness and widespread, increasing view that its products and services are essential for one’s daily business operations and customer relations.
The stickier the products and the better the insights and results that follow, the higher the likelihood that its core business is well insulated (but not completely, obviously) from economic headwinds and other rough air.
At any rate, let the analysis commence.
Salesforce’s stock financials
The company’s share price (NYSE: CRM) is currently trading at $213.85 with an accompanied market capitalization of a whopping $208.29 billion, a price-to-earnings (P/E) ratio of 557.33 along with no annually distributed dividend offered to its shareholder base at the moment.
So far, so interesting as this company has gotten quite large (in reference to its prevailing market capitalization) in a relatively short span of time along with the fact that its price-to-earnings ratio (at the time of this writing) is wildly, wildly, did we happen to mention wildly above that of the commonly held fair value benchmark of 20, implying that its shares are trading at a fairly massive premium, however, we tend to be a bit more lenient with companies that are experiencing tremendous amounts of revenue growth since it can perhaps justify (that is, largely depending on the rate of growth) an outsized price-to-earnings ratio, as just might be the case with Salesforce.
Allow us to do some more digging.
With respect to the shape and overall condition of the company’s balance sheet, Salesforce’s executive team is tasked with tending to and managing approximately $98.9 billion in terms of total assets along with around $41 billion in terms of total liabilities, which strongly indicates that this company’s management team is filled with exceptional debt managers and deployers, as the aggregate amount of its assets outweighs that of its liabilities by more than two times over, which is especially impressive since we suspect this company has been growing quite a bit over the last handful of years and thus tacking onto its outstanding debt(s) and other liabilities.
Perhaps Salesforce has great margins and/or it is incredibly efficient with its capital while also being more than conscious regarding keeping its debt levels comparably low.
Whichever the case may be, we are happy campers.
Moving onto the company’s income statement, Salesforce’s total annual revenues have been like the San Antonio Spurs highly anticipated rookie draft pick, Victor Wembanyama; growing like crazy.
Seriously guys, the dude is like 7’5”.
Putting our hit-or-miss humor aside, the company’s total annual revenues since 2019 have experienced some meaningful growth, to say the least.
For instance, Salesforce’s total annual revenue in 2019 stood at nearly $13.3 billion, just north of $17 billion in 2020, $21.2 billion in 2021, almost $26.5 billion in 2022, leading all the way up to its latest reported figure (displayed on TD Ameritrade’s platform) of $31.3 billion, as reported in 2023.
With year-over-year (YOY) growth such as this, it’s no wonder the company’s price-to-earnings ratio is rather elevated at the moment, however, still, from a revenue growth standpoint alone, these (nevertheless impressive) figures don’t justify the premium valuation this company currently maintains, from our perspective.
Nevertheless, far be it from us to dog any sort of consistent, impressive annual revenue growth, especially throughout the recent and current market volatility and other unexpected as well as unprecedented headwinds.
While for many (if not most) software as a service (SaaS) companies it is a challenge to eek out positive total cash from its operations as well as generate positive net income on a consistent basis, Salesforce is clearly bucking both of these usual realities and has seemingly entered into some alternate state where it is able to carve out a lot of cash flow when others can’t.
Obviously, these are positives.
Specifically, what we find to be most compelling within Salesforce’s cash flow statement is the recent and more current state of its total cash from operations, as it has grown each year (also referencing since 2019), beginning its journey at around $3.4 billion in 2019 and ending at around $7.1 billion, as reported in 2023.
To have been able to produce this amount of cash throughout recent years impresses us greatly, again, especially since many other established leaders in the SaaS space struggle on this front, regardless of market cycle.
Salesforce’s stock fundamentals
Transitioning into this company’s displayed profitability metrics, Salesforce’s trailing twelve month (TTM) net profit margin, as displayed on TD Ameritrade’s platform, stands at 1.18% to the industry’s listed respective average of 17.47%, which, at face is rather disheartening but also, if you really think about it, makes some sense, as Salesforce is still growing at a rapid rate and in turn might be retaining and/or reinvesting more of its earnings as well as growing and sacrificing some near-term TTM net profitability to perhaps better establish a stronger long-term on the profitability front.
Whatever the case may be, we do think it is worth having some patience with Salesforce, as it has already been seen that this company is quite cash flow generative and already the major leader in the growing and continuously developing CRM sector.
Regarding the company’s TTM returns on both assets and investments, also referencing the figures displayed on TD Ameritrade’s platform, they are also rather lackluster when compared to the industry’s listed averages, both standing between 0% and 1% to the industry’s low-to-mid, teen averages.
With all of the investments this company is making in artificial intelligence as well as other aspects of its business, we think it is still doing a fine job staying well ahead of its competition and in time, these TTM core returns and its TTM net profit margin will catch up to the industry’s respective averages sooner rather than later.
Should you buy Salesforce stock?
This company will probably go down as one of the more innovative SaaS companies to have ever existed.
But make no mistake about it, Salesforce’s growth and world CRM domination is far from over, from where we stand.
Even though this is the case, we just don’t feel good about splurging and shelling out a more than gross premium for shares of the company’s stock (NYSE: CRM), especially in this current market environment, even though we do expect its annual revenues to continue rising, they just aren’t growing fast enough to justify paying nearly 600 times earnings for a slice of the Salesforce pie, no matter how appetizing it may look.
In time, however, if/when its valuation comes back down to earth we will certainly be on watch to consider a stake in this company, but for now it just doesn’t make sense, as valuation is essentially our one and only sticking point at the moment.
Thus, it would be most appropriate if we gave this company’s stock a “sell” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.