Is This Stock Stuck In The Clouds?

The global customer relationship management market size was valued at $52.4 billion in 2021 and is anticipated to expand at a compound annual growth rate (CAGR) of 13.3% from 2022 to 2030.

One of the largest and most well-established players in the space is Salesforce (CRM). 

Shares are down significantly year-to-date.

And lately, interest has waned as search volume for the software company declined, dropping it to second place in software searches amongst financial pros.

Yet, shares jumped on the last earnings report with volume tripling in a single day.

But is now the time to buy the dip, or is there more pain on the way?

Find out our analysis below. 

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Salesforce’s Business

Customer relationship management software enables businesses to manage the customer journey end-to-end, from lead generation to sales and service.

Salesforce.com (CRM) is a leader in this technology. The firm’s cloud-based applications handle sales, service, and marketing, and don’t require IT experts to set up or manage. 

It offers a flexible platform enabling companies of various sizes, locations, and industries to build business apps to bring them closer to their customers with drag-and-drop tools. 

The online learning platform allows anyone to learn in-demand Salesforce skills. Plus they acquired the popular communication service Slack.

CRM provides marketing solutions that enable companies to orangize, plan, and optimize the customer marketing journey. The company’s commerce platform enables clients to align the customer experience across mobile, web, social, and store commerce points. 

Its services include Tableau, an end-to-end analytics solution serving various enterprise use cases, and MuleSoft, an integrated offering that allows its customers to unlock data across their enterprise. 

CRM breaks its revenue components down to sales, services, marketing and commerce, platform and other, and data. 

CRM boasts more than 150,000 companies that use their platform. Plus, it ranks #1 as the top software provider worldwide by revenues for nine consecutive years. 

In the last few years, CRM almost doubled its revenue growth, from $13.3 billion in FY19 to $26.5 billion in F22. Additionally, it’s the fastest-growing large enterprise software company with $26.5 billion in revenue in FY22.  

Financials

A quick look at the capital structure, and we’ll see CRM has $13.5 billion in cash, total debt of $14.3 billion, and a market cap of $181.9 billion. 

As noted above, CRM has nearly doubled its revenues in three years. All while maintaining an impressive gross margin of 73.5%

One metric Wall Street and investors care about a lot more these days is operating income. Operating income measures the amount of profit realized from a business’s operations after deducting operating expenses. 

CRM has been able to improve its $548 million in 2022, nearly doubling from 2018. 

EPS calculates the company’s profit divided by its outstanding shares of its common stock. The higher the EPS, the more profitable the firm is. CRM has nearly tripled its EPS from 2018, which stands at 1.48x in 2022. 

Of course, all eyes are on liquidity, financial health, and cash flow. Two metrics we’ll use to measure Salesforce are the current ratio and the quick ratio. 

In 2022, CRM had a quick ratio of 0.93x. If a company has a quick ratio above 1, it means it has more quick assets than current liabilities. However, at 0.93x, CRM falls a little short. 

During the same period, CRM had a current ratio of 1.05x, which means its assets are enough to pay for its short-term obligations.  

CRM has been improving its free cash flow year after year. For example, in 2019 it was generating $2.8 billion in free cash flow, and in 2022 it is generating $5.2 billion in free cash flow. 

Valuation

CRM is a profitable company, but it has a relatively high P/E ratio of 40.95x, which is significantly higher than the S&P 500 average of 20.1x. However, it is worth noting that 40.95x EPS is considerably smaller than the company’s five-year average of 62.93x. 

The firm’s price to cash flow is currently at 28.88x, which is a bit worse than the sector median of 20.20x. 

While CRM ranks as the top dog in its category, there are other companies that offer similar solutions. 

CRM has better profitability numbers than HUBS, ZEN, and PEGA, in terms of EBITDA margin and net income margin. It also generates significantly more cash from its operations than those three. 

Salesforce is growing its revenues faster than ADBE, IBM, and PEGA. 

Our Opinion – 5/10

CRM is part of the S&P 500 and a member of the Dow 30. Year to date, it is one of the worst-performing Dow stocks, ranking as the sixth-worst. 

However, it still has a relatively high P/E and price-to-cash flow ratio, metrics that investors are paying close attention to in this market. We believe it needs to drop further for CRM to be considered a buy.