Will Salesforce survive?
Will Salesforce survive?

How long will Salesforce be in the market?

Salesforce (NYSE:CRM) is a cloud-based software company based in the United States. Its software helps businesses organize and manage their sales operations and customer relationships. Marketing, e-commerce, and data analytics have also been added to the company’s offerings. Salesforce is most likely the most well-known CRM and project management software application. Salesforce was founded in 1999 by entrepreneurs Marc Benioff and Parker Harris and quickly rose to prominence due to its innovative, user-friendly features. However, the company has recently encountered some issues, which has contributed to the stock losing roughly half of its value in the previous year, with a significant portion of it occurring after the company released its Q3 FY23 results.

Almost a month has passed since Salesforce’s last earnings report, and shares have fallen about 12% in that time. Many investors are wondering if the recent decline in the stock price will continue leading up to Salesforce’s next earnings report, or if the company is about to break out.

Salesforce has seen consistent revenue growth in recent years. Unfortunately, the company’s financial situation has deteriorated significantly in 2022. In 2021, the company’s revenue is expected to be around $26.5 billion, a 25% increase over the previous year. However, the corporation’s revenue has increased by more than 14% this year, reaching $30.3 billion. Although 14% is a respectable rate of growth, it is significantly lower than the 25% to 35% that the company’s shareholders are accustomed to.

The financial situation is even worse. Salesforce has lost more than half of its previous year’s earnings, resulting in a net margin of less than 1%, or less than $300 million. Interest expenses ate up a large portion of the company’s revenue, resulting in a drop in net income and stock price. However, the company’s exceptionally high gross margin of more than 72% leaves plenty of room for profit growth. This is most likely one of the factors that analysts consider when forecasting a 15%-25% annual increase in earnings per share over the next five years.

Resignations and Layoffs

Businesses are scrutinizing their budgets and reducing investments as a result of the current macroeconomic climate, and Salesforce is no exception. As a result of this environment, deals may remain in Salesforce’s pipeline for a longer period of time, increasing the pressure to make new sales and retain current clients. Deals may take longer to close, resulting in billings remaining unpaid for longer than in previous cycles, reducing cash flow and operating capital. Salesforce has, predictably, begun to lay off employees. Although it refused to provide an exact figure, the corporation laid off hundreds of workers two months ago, claiming that the total was less than a thousand.

However, managing layoffs is not the only issue confronting the company. Some high-level executives resigned on their own, which will likely make some stockholders even more concerned.

Salesforce co-CEO Bret Taylor and Slack CEO Stewart Butterfield both announced their resignations a month ago, and the stock fell to a 52-week low following the company’s earnings report. While this may appear to be concerning, it is not uncommon for executives of acquired companies to leave after a mutually agreed-upon exit date. Given that the Slack deal was made about two years ago, Butterfield’s departure isn’t entirely surprising.

On the other hand, it’s unclear why Taylor left. Taylor has a track record of co-founding companies and profiting from acquisitions. Taylor, according to Benioff, left Salesforce to start a new company. When asked why he was leaving, Taylor responded:

After much deliberation, I’ve decided to return to my entrepreneurial roots. Salesforce has never been more relevant to customers, and with a best-in-class management team and the company firing on all cylinders, now is the time for me to step down.

Taylor was the former chairman of the board at Twitter, in addition to his duties at Salesforce, and it should be noted that Twitter and its leadership have had a turbulent year. In the end, while Taylor’s departure is a setback for Salesforce, investors should remember that Benioff effectively ran the company for approximately 15 years, demonstrating not only his managerial skills but also his business acumen. In fact, he has already discovered the next “engine” that will propel the company forward.

Salesforce’s AI Platform

Salesfoce's AI Platform
Source:Salesforce.com

Artificial intelligence is one piece of technology that Salesforce believes will boost sales. In September 2016, the creator of business software unveiled the cloud-based “Einstein” artificial intelligence software platform. The first Einstein AI software tools assisted salespeople in making predictions about which deals were most likely to close based on historical data about leads and accounts.

Furthermore, over the last three years, Salesforce has integrated AI approaches into other enterprise software packages, with a focus on industries such as the financial services sector that are undergoing digital transformation. Einstein AI is mostly powered by chatbots.

Salesforce stated on its first-quarter earnings call that its customers were making more than 164 billion Einstein predictions per day, an increase from the 100 billion forecasts made a year ago. However, Salesforce has yet to publish any financial data indicating the amount of money brought in by the Einstein AI platform.

AI and Tableau Salesforce and Tableau salesforce.com

Salesforce AI and Tablue
Source:Salesforce.com

Salesforce agreed to buy data analytics firm Tableau for $15.7 billion in an all-stock deal in 2019. Tableau is a data visualization software company. Furthermore, it allows users to create databases, graphs, and maps by utilizing time series analytics, which is a method of examining a collection of data points that are sorted chronologically.

Salesforce now expects Tableau’s business intelligence software and Einstein’s artificial intelligence products to work together. In addition, Salesforce announced that it would rebrand Einstein Analytics as Tableau CRM.

The Future Is Bright

The digital transformation movement, which accelerated in early 2020, aided all cloud-based businesses, and Salesforce capitalized on this opportunity with its subscription-based business model and proprietary apps.

Following two years of exceptional performance, revenue growth has slowed this year, prompting investors to penalize the company. As previously stated, this slowdown is being caused by macroeconomic headwinds, as companies of all sizes are cutting back on spending and deferring large software deals. Currency headwinds have also been caused by the strengthening dollar, which has been supported by higher interest rates, and analysts predict that revenue will increase by only 9% in the fourth quarter as a result of these macro factors.

Despite these reservations, Salesforce has a large window for growth because global adoption of the remote work trend is still in its early stages, and Salesforce’s addressable market (TAM) will grow in the coming years as businesses in highly regulated industries migrate to the cloud.

AppExchange ssalesforce.com

Salesforce announced the addition of more than 250 commerce partner apps to AppExchange, a leading enterprise cloud marketplace that provides ready-to-install apps, solutions, and consultants to help businesses save money, improve efficiency, and drive customer success on commerce cloud. This move may also help the company grow in the future.

Salesforce CRM valuation

Salesforce received a D+ in Seeking Alpha’s valuation model, as shown above. Aside from the P/B ratio, the company performed poorly on nearly every metric, and the majority of them indicate that the company is overvalued even in comparison to its competitors. However, there are a few reasons why the company may be deserving of this premium:

Moat

Salesforce is a forerunner in the field of customer relationship management. The company’s network impact and strong brand have aided in the construction of its moat. It has a high client retention rate due to its high switching expenses, and because of its size, it has access to a wide range of services. However, the highly competitive nature of the CRM sector poses a threat to Salesforce’s moat. However, investors should be encouraged by the high pricing on the company’s long-term contracts. Furthermore, Salesforce was a pioneer in the CRM space, and its impeccable timing allowed it to establish a lead. Salesforce is the industry leader in CRM, with a 24% market share.

Future Prospects

Analysts predict that Salesforce’s revenue will grow by double digits for at least the next eight years, in addition to growing at a respectable rate in recent years. Analysts forecast that the company’s EPS will be 12.56 by 2028. With a P/E ratio of 20, you get a future price of around $251. This implies an annual ROI of nearly 13% for the next five years.

As a result, even if the stock is currently trading at a premium, the company’s moat and projected earnings could more than compensate for it, bringing the stock closer to a fair valuation.

Summary

Overall, Salesforce has demonstrated strong financial performance and has been able to capitalize on rising demand for cloud computing services and CRM software over time. Although the company will face risks and difficulties, its history of innovation and adaptation suggests that it is well-positioned for future success. However, given the difficulties that the tech industry is facing, it is unlikely that Salesforce’s reputation will improve anytime soon. In the long run, however, Salesforce is well-positioned to provide strong earnings growth. Having said that, I believe the company’s stock is fairly valued because the potential for a bright future has already been factored in. As a result, I rate the stock as a HOLD, but I will keep an eye on it and likely start a position if it falls into the $100-$110 range.

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