Salesforce.com: Brilliant Quarter And Reasonable Valuation
Even a mediocre company can do well when the economy is strong and the wind is on its back. But it takes a particularly strong business to deliver blowout earnings during a sharp recession and in periods of record uncertainty on a global scale. Salesforce.com (CRM) has just delivered precisely that, and this speaks volumes about the quality of the company and its management team. Furthermore, the stock is not too expensive at all at current levels, so Salesforce.com is well-positioned for sustained outperformance going forward.
Firing On All Cylinders
Revenue during the quarter reached $5.15 billion, growing by 29% year over year and exceeding Wall Street estimates by $200 million. Salesforce.com has an impeccable trajectory of outperformance, the company has delivered revenue numbers above Wall Street expectations in each of the past 16 quarters in a row.
Source: Seeking Alpha
In this last quarter, the magnitude of the revenue surprise was even larger than usual, and Salesforce.com outperformed sales forecasts by a record difference in percentage terms.
Source: Seeking Alpha
Remaining performance obligation stands at $30.6 billion, an increase of 21% year-over-year. The current remaining performance obligation came in at $15.2 billion, an increase of 26% year-over-year and 24% in constant currency. This bodes well for the company going forward.
Profit margins expanded considerably during the period, and rapid revenue growth in combination with expanding profit margins allowed Salesforce.com to deliver a massive beat in earnings per share during the period.
Adjusted earnings per share came in at $1.44 versus $0.77 expected on average by the analysts following the stock. Also on the bottom line, Salesforce.com outperformed expectations by a record margin.
Source: Seeking Alpha
Source: Seeking Alpha
From a competitive perspective, Salesforce.com looks stronger than ever, which is particularly important. Periods of volatility and uncertainty are when market leaders can either consolidate their competitive leadership or they can start losing ground versus the competition. In this case, Salesforce.com is leveraging on its strength to become even more dominant in CRM.
Source: Salesforce.com
The company had lowered its full-year guidance due to the particularly uncertain environment in the prior quarter. In a sign of confidence, management now raised revenue guidance to between $20.7 billion to $20.8 billion versus prior guidance for $20 billion. The new guidance compares favorably versus $20.08 billion estimated on average by analysts.
An excellent quarter from Salesforce.com provides validation for two main drivers in the bullish thesis. To begin with, digitalization and customer relationship management are key investments for corporations all over the world, and customers are not looking to cut spending in such a critical area in times of pandemic and work from home.
Just as important, management has the skills to sail through the storm and to continue delivering solid returns at the top line and the bottom line, even under particularly uncertain circumstances.
More Upside Ahead
The software sector has been on fire over the past several years and especially more during the pandemic. Many of the companies in the sector have delivered very resilient numbers in recent months, especially when comparing sales and earnings numbers for software companies versus most other sectors in the economy.
The other side of the coin is that valuations have expanded substantially because of this outperformance, and many companies in the software sector are currently trading at record valuation levels.
But that is not the case when it comes to Salesforce.com. Looking at valuation multiples based on revenues, EBITDA, and cash flow from operations, Salesforce.com stock is priced in line with average valuation levels for the company over the past five years.
Data by YCharts
From a comparative perspective, Salesforce.com looks quite reasonably priced too. The table compares some basic data for Salesforce.com versus Intuit (INTU), Adobe (ADBE), Microsoft (MSFT), and Autodesk (ADSK). The comparison is not completely straightforward because these four companies operate in different segments and they have their own unique weaknesses and strengths. Nevertheless, it can be interesting to get a rough approximation of Salesforce.com's valuation in comparison to other big software companies.
Looking at sales growth in the past five years and also in the trailing twelve-month period, Salesforce.com has the highest growth rates in the group. Interestingly, Salesforce.com also has the lowest price to sales ratio among the 5 companies in the table.
This can be justified to some degree by the fact that Salesforce.com still has relatively small profit margins in comparison to the more mature software companies. Nevertheless, margins are moving in the right direction over time, and it is not much of a stretch to say that Salesforce.com has some room for valuation expansion from a comparative perspective.
CRM | INTU | ADBE | MSFT | ADSK | |
Sales Growth 5Y | 26.05% | 9.84% | 21.94% | 8.99% | 5.42% |
Sales Growth TTM | 30.06% | 1.17% | 19.67% | 13.95% | 24.01% |
Price to Sales TTM | 10.44 | 12.83 | 19.23 | 11.43 | 16.35 |
Valuation ratios should always be interpreted in the context of other return drivers. A company that generates strong growth and consistently beats Wall Street expectations deserves a higher price/sales ratio than a business with below-average growth rates and often underperforming expectations.
However, it can be complicated to incorporate multiple factors into the analysis and quantify them in order to see the complete picture. In that spirit, the PowerFactors system is a quantitative system that ranks companies in a particular universe according to a combination of factors: financial quality, valuation, fundamental momentum, and relative strength.
Data from S&P Global via Portfolio123
The backtested performance numbers show that companies with high PowerFactors rankings tend to deliver superior returns over the long term, and the higher the ranking, the higher the expected returns.
Salesforce.com has a PowerFactors ranking close to 93 as of the time of this writing. This means that the stock is in the top 7% of companies in the US stock markets based on quality, valuation, fundamental momentum, and relative strength together. After the recent earnings beat, the PowerFactors ranking for Salesforce.com will probably increase even further in the days ahead.
The numbers alone cannot tell you the whole story, there are some crucial fundamental factors that go beyond the plain mathematics of valuation and growth. Nevertheless, it is good to know that Salesforce.com still has room for further upside potential from current levels if management keeps executing well and the company continues crushing expectations going forward.
The Big Picture
Growth tends to naturally slow down over time, especially as a company gains size. It is obviously much easier to generate high growth rates from a small revenue base, and Salesforce.com is well on track to exceed $20 billion in annual revenue this year. One of the main risks for investors in Salesforce.com is that revenue growth could decelerate more abruptly than expected, which could have a negative impact on the stock price.
There is no sign of that in the most recent earnings release. On the contrary, the company is firing on all cylinders in a challenging environment. But that is precisely the point, a high bar is difficult to beat, and expectations for Salesforce.com will be quite elevated over the middle term now that the company has crushed expectations once again.
Speaking of which, acquisitions have been a major growth engine for Salesforce.com in recent years, and this can be a very smart strategy when done right. If you have the resources, scale, and customer reach, growth via acquisitions can be remarkably effective both from a financial and strategic perspective. The company's track record in this area is outstanding, but integration risk is always an important consideration when assessing a position in Salesforce.com going forward.
Those risk factors being acknowledged, the bullish thesis for Salesforce.com is actually quite simple and straightforward. The company is producing outstanding financial performance with vigorous revenue growth and expanding profit margins during a daunting recession. This shows that Salesforce.com is a mission-critical solution to its customers and that management knows how to deliver in good and bad times.
At these prices, the stock is also fairly reasonably valued when considering the quality of the business, so chances are that Salesforce.com stock will deliver solid returns for investors in the years ahead.
Disclosure: I am/we are long CRM.
Disclaimer: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship ...
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