Salesforce Stock Looks Cheap

Salesforce CRM recently reported earnings with the following highlights:

Revenue of $9.8 billion, up 8% YoY
Subscription & support revenue of $9.3 billion, up 8% Y/Y
Operating margin of 32.3%, compared to 33.0% from last quarter
Free cash flow of $6.3 billion, up 4% Y/Y

-$2.7 billion in share repurchases (1% of total shares in just 1 quarter) and $402 million in dividends

The free cash flow growth has slowed significantly compared to last quarter (4% compared to 31%), which may seem to be a concern on first sight, but if you look at the data for the past 5 - 10 years instead, even though Salesforce’s FCF slows down from time-to-time, it is still growing very fast at 25%+ annually.

However there is no doubt that the overall growth of the company is slowing down recently by looking at its revenue trend. The average revenue growth for the past 10 years, 5 years and 3 years has been 21%, 16.18% and 11.36% respectively. Assuming the company will continuously grow its revenue by 8% per year over the next 10 years, factoring in the share repurchases, it should be reasonable to expect the revenue per share and FCF per share to be growing at around 10% annually over the long term.

I personally think it will be easy for Salesforce to achieve this growth projection and has the potential to outperform due to the high switching costs because of its sophisticated integrations with other enterprise software platforms.

For example, in my current job, Salesforce is a critical part of our client bug reporting process. When a client reports a bug or requests through the Salesforce ticketing system, it automatically propagates through the Salesforce Jira integration to notify the development team with minimal delay (Jira is a task managing software widely used in tech companies). Since most of our internal processes are built around this Salesforce integration and most of our clients use Salesforce, it is extremely difficult if not possible to switch to another provider.

There is also a network effect in play here, since many large enterprises uses Salesforce for customer support, their new clients will likely use Salesforce as well to reduce the frictions. On the other hand, the service provider will use Salesforce if the majority of their client uses it. The same is happening with Slack as well, which was the main platform used in my previous 2 jobs.

With the above mentioned business strength, it should allow Salesforce to continuously acquire new customers and raise prices on their existing services. On top of that, the company is also trying to drive further growth through acquisitions and developing new AI products such as the AgentForce, which has been showing great progress in the recent quarter. Overall, I like Salesforce’s valuation, growth prospects and will continue holding the stock for the long term.

Stock Valuation

The estimated fair value of the stock is $347.92, indicating a CAGR of 15.3% in the next 5 years. Here are the assumptions for the DCF model:

Latest TTM FCF $12.647 billion
FCF growth rate of 10% (5YR avg of 29.9%)
1% annual share repurchase (3YR avg -1%)
Future P/FCF of 25 (5YR avg 34)
Discount rate of 10%

You can also see all my past CRM stock analysis using this link.

Holdings Disclosure

SoloFIRE CRM ownership: 2% of portfolio
SoloFIRE CRM Average Cost Paid: $260
Holding time: less than 1 year

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DISCLAIMER: Solofire is not a registered financial advisor. This post contains author's personal opinion only and it should NOT be considered financial advice.