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Salesforce (CRM): Is It Too Late To Buy?

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Salesforce (CRM - Free Report) shattered earnings estimates on Wednesday after market close, surging the stock close to 10% this week. Salesforce reported its most profitable quarter ever, beating EPS estimates by over 50%. They also beat revenue estimates, displaying the strongest sales numbers since inception. The question that we need to answer as potential investors is whether or not we missed our window of opportunity to profit from CRM?

CRM raised EPS guidance for the full year by over 5%, elevating revenues marginally and keeping operating cash flow unchanged. These revised guidance figures are still 7% above analysts’ estimates, which leads me to believe that there may be more upside potential for CRM. Analysts have adjusted earnings this week and I expect this will continue as more adjust their models upward. CRM is currently sitting at a Zacks Rank #3 (Hold) but look to see this move to a 1 or 2 buy.

Their revenue is still being driven primarily by its Sales Cloud (customer relationship management, aka CRM) platform which has been the foundation of the firm since it began, but its other bets are growing fast. The Salesforce Platform and CRM’s other bets driven by Quip and Mulesoft are growing at a rate of 46% year-over-year (YoY), far above sales as a whole which expanded 24%.

Salesforce has illustrated exceptionally consistent top-line expansion with YoY growth never falling below 20% since the firm’s birth. Below you can see how dependable CRM’s sales growth has been even on a quarter to quarter basis.


The only thing that is holding me back from jumping into this solid investment right now are its huge multiples. CRM’s P/E is trading miles above its closest competitors, possibly caused by the fact that it’s only been profitable since 2017. Price-to-sales (P/S) may be a better multiple to compare this fast-growing firm. CRM (blue) is trading just above the industry average with a P/S of 7.1x, compared to the industry’s 6.5x. It is currently trading in line with Microsoft (MSFT - Free Report) , and below Adobe (ADBE - Free Report) which is being valued at 11x P/S.


Take Away

Salesforce is expected to grow its top-line around 20% for the next two years, which would keep its 20% or better growth streak alive. CRM has beaten sales estimates every single quarter for as far as I can see back (2012) and there is no reason why this trend wouldn’t continue. The dependability of its top-line is what’s driving these seemingly excessive multiples, but if Salesforce can continue on its current path this stock will go nowhere but up.

EPS estimates have been adjusting up and this is likely to continue as more analysts adjust their models. I would say it is reasonable to assume that Salesforce still has upward potential for capital gains. CRM is 2.7% off its all-time high from March and I could see this stock busting through the $170 level as momentum and optimism continue to grow.

On the next earnings release expected in September, look to see if its topline expansion can remain above 20%. Keep an eye on Salesforce’s other bets to see if the prolific growth can continue and ensure that its bread and butter “Sales Cloud” revenue sustains its upward drive.


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