Salesforce: Acquisition-Fueled Growth

Salesforce has been a polarizing stock for many. While the company is growing rapidly, its profitability has remained weak for quite a long time. Further, much of its growth has been funded through recurring acquisitions.

Still, while Salesforce lowered its own guidance back in its Q1 report, shares are currently trading near all-time high levels at around $195. The company projects FY2020 revenues of $20 billion, and while it's true that no consistent net profits have been reported, gross profits are currently (last twelve months) $13.65 billion in $18.23 worth of turnover. We believe that gross profits growing in line with sales, as is the case, is what matters the most.

The company can lower its CAPEX at any time, and report strong profitability. However, its philosophy has been that keeping on growing and acquiring companies to unlock multiple synergies among its products is the way to go. 

Over the past few years, Salesforce has acquired more than 60 firms. To highlight one of the merits of its acquisition-oriented growth strategy, let's consider one example. The company acquired MuleSoft back in 2018, which was growing sales at ~38%. By the end of 2019, the company had accelerated its revenue growth to 52%, after being blended into the Salesforce ecosystem.

Combining its acquisition-based growth and organic growth, Salesforce currently boasts a 5-year turnover CAGR of 26.4%. Its 5-year gross profit CAGR has been a similar 26.1%, which demonstrates that, even though net profits are always reinvented, its underlying potential profitability is also growing rapidly.

In terms of its valuation, we believe that the stock is priced fairly, considering its growth. Let's examine Salesforce, along with three other companies in the tech sector, growing rapidly as well: Adobe, Paypal, and Intuit. The four companies have a P/S ratio of 9.6, 17.7, 12, and 11.7, respectively. Meanwhile, their last-twelve-months revenue growth is currently 30.1%, 19.3%, 17.6%, and 3.1%, respectively. Therefore, Salesforce is growing the fastest but is priced the lowest compared to the rest of the three firms. Overall, reflecting on the tech sector's absurd valuations all around the board, Salesforce offers adequate value at its current price.

When it comes to its risks, we would like to highlight the dangers of its acquisition-oriented strategy, despite working efficiently so far. Firstly, along with reinvesting every bit of potential profitability, the company has been issuing a great number of shares to fund its acquisitions. Over the past decade, its shares outstanding have jumped by around 73.3%. While great value is being added under this method, any unsuccessful acquisitions will dilute existing shareholders, destroying shareholder value. Further, we need to consider those future acquisitions may not always be sustainable, as synergy-optimal fits may not constantly be plausible. 

Overall, we believe that Salesforce is a great stock, offering attractive returns in the long run. Operated by the well-proven CEO, Mark Benioff, Salesforce has been dominating the SaaS market, enjoying recurring cash flows thanks to its subscription-based products. The security is also held by institutional investors, including Appaloosa Management.  Despite some risks related to its growth strategy, we believe that that the company is set to continue advancing in the ever-growing SaaS space, offering investors an attractive return profile, at a decent valuation.