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Salesforce Banks on Cloud Offerings, Competition Woes Remain

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On Sep 3, we issued an updated research report on San Francisco, CA-based, Salesforce.com (CRM - Free Report) .

The company is on a growth trajectory, gathering momentum from its positive earnings surprise history. Notably, the company beat the Zacks Consensus Estimate in each of the trailing four quarters, delivering an average positive surprise of 30.9%.

The company reported strong fiscal second-quarter 2019 results. The top- as well as the bottom lines surpassed the respective Zacks Consensus Estimate and improved significantly year over year. Salesforce raised its fiscal 2019 guidance and stated that it is on track to reach $23 billion in annual revenues by fiscal 2022.

For fiscal 2019, the Zacks Consensus Estimate for earnings has increased 7 cents to 38 cents in the past seven days.

Notably, shares of Salesforce have gained 49.4% year to date, substantially outperforming the industry’s 26.2% rally.

 

 

Strong Product Portfolio, Buyouts Drive Growth

Salesforce’s focus on product launches and cloud services is driving revenues. The company’s diverse cloud offerings and strong spending on digital marketing remain catalysts.

Management is extremely optimistic about enhancement of customer experience that has aided growth of the cloud segment. Artificial intelligence (AI) related innovations have further boosted the same with Einstein Analytics providing helpful insights. Einstein Bots, launched in the quarter, is expected to gain more traction among customers.

The company is benefiting from a robust demand environment as customers are undergoing a major digital transformation. Moreover, the recent federal tax cut led to a robust increase in spending by enterprise, which is a tailwind for the company.

Acquisitions have always been one of Salesforce’s key growth strategies. Over the last two years, the company has closed a number of takeovers worth a combined deal value of over $4 billion.

Additionally, the recent buyout of MuleSoft, the company’s biggest ever acquisition is considered a major positive. MuleSoft contributed $122 million to total revenue in the last reported quarter. We believe that Salesforce’s sustained focus on expanding its business through strategic acquisitions and investments will drive growth over the long run.

Competition, FX Volatility Remain Headwinds

Salesforce faces stiff competition from Microsoft (MSFT - Free Report) and Oracle (ORCL - Free Report) in the cloud-based CRM market. Oracle has strengthened its cloud position through various strategic acquisitions. Microsoft has also added various key companies like LinkedIn to its portfolio to beef up its Dynamic CRM platform. Additionally, Microsoft offers special pricing for its Dynamics CRM Online service, which is helping it to attract Salesforce’s customers. 

Moreover, foreign exchange volatility remains a key concern for the company. The company anticipates currency volatility to have approximately $75 million to $100 million impact on revenues for the remainder of the year.

Zacks Rank and A Key Pick

Salesforce currently has a Zacks Rank #3 (Hold)

A better-ranked stock in the broader technology sector is Aspen Technology (AZPN - Free Report) , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.

Long-term earnings growth rate for Aspen is currently projected to be 16.5%.

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