Is Salesforce Stock a Purchase?

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Selling power‘s (NYSE: CRM) The action recently erupted after the cloud services company released its report on its first quarter of fiscal 2022 results. Its revenue increased 23% year-on-year to $ 5.96 billion , beating estimates by $ 70 million, and increased 20% in constant currency.

Its non-GAAP earnings rose 73% to $ 1.21 per share, topping expectations by $ 0.33 as its GAAP earnings more than quadrupled to $ 0.50 per share. Gains from its strategic investments increased its non-GAAP and GAAP earnings by $ 0.24 and $ 0.23 per share, respectively.

Image source: Getty Images.

During the conference call, CEO Marc Benioff said it was “the best quarter Salesforce has ever seen.” Let’s see why Benioff made such a bold statement and whether or not it’s time to buy Salesforce.

Accelerate revenue growth

Salesforce’s revenue growth accelerated from its 20% growth in the fourth quarter of fiscal 2021. It also exceeded its own forecast for growth of around 21%, which had already been recorded in the fourth quarter. trimester. Its turnover increased by double digits in its four main activities.

Segment

Returned

Year-over-year growth

Sales

$ 1.4 billion

11%

A service

$ 1.5 billion

20%

Platform and others

$ 1.7 billion

28%

Marketing and Commerce

$ 0.9 billion

25%

Data source: Salesforce.

It also generated double-digit sales growth in the Americas, EMEA (Europe, Middle East and Africa) and APAC (Asia-Pacific) regions, even as currency headwinds dampened its growth in several markets.

Region

Returned

Growth (YOY)

Growth (YOY, CC)

Americas

$ 4.1 billion

21%

22%

EMEA

$ 1.3 billion

26%

17%

APAC

$ 567 million

23%

17%

Data source: Salesforce. YOY = Year after year. CC = Constant currency.

Salesforce’s current remaining performance obligation (CRPO), which represents its expected future revenue from existing contracts over the next 12 months, increased 23% year-on-year to $ 17.8 billion, indicating that its revenue growth will remain comfortably above 20% for the rest. of the year.

That’s why Salesforce raised its annual revenue forecast from $ 250 million to around $ 26 billion, which would represent a 22% growth from 2021. It also reiterated its goal of generating $ 50 billion in annual revenues by fiscal year 2026.

Increased cash flow and inorganic growth

Salesforce’s operating cash flow jumped 76% year-over-year to $ 3.2 billion in the first quarter, while its free cash flow soared 99% to $ 3.1 billion. It typically generates its strongest cash flow growth in the fourth and first quarters because that’s when it usually collects its annual fees.

Nonetheless, Salesforce’s year-over-year growth remains robust and indicates that it can still easily fund new investments and acquisitions. Its cash, cash equivalents and marketable securities increased 53% year-on-year to $ 15 billion in the quarter.

Speaking of acquisitions, Salesforce expects to complete its buyout of Soft (NYSE: WORK) in the second trimester. This $ 27.7 billion acquisition, which includes $ 26.79 in cash and 0.0776 common share of Salesforce for every share of Slack, will temporarily reduce its cash flow and earnings this year.

However, integrating Slack’s business communication platform into its CRM (customer relationship management) services will likely lock out more users, remove barriers between its cloud services, and improve its Customer 360 platform. to digitize customer experiences.

Slack will deliver more data to Salesforce’s Einstein artificial intelligence platform and complement its earlier acquisitions of application network provider MuleSoft and data visualization platform Tableau.

Stable operating margins

Salesforce controls about a fifth of the global CRM market, according to IDC, while its closest rivals all have single-digit shares. This market leadership position, along with its expanding ecosystem of services, gives the company considerable scale and pricing power.

That’s why its non-GAAP operating margin increased 710 basis points year-on-year to 20.2% in the quarter, and its GAAP operating margin increased 880 basis points to 5.9. %.

For the full year, Salesforce expects its non-GAAP operating margin to increase by about 30 basis points to 18%, but its GAAP operating margin to decline by 70 basis points to 1.4 % with the integration of Slack.

An attractive balance between growth and value

Salesforce expects its non-GAAP EPS to drop 22% to 23% and its GAAP EPS to dip by about 95%. Those declines, which can be mostly attributed to its takeover of Slack, appear steep – but Salesforce actually upped both earnings estimates from its previous guidance in the fourth quarter.

Based on these expectations, Salesforce is trading at around 54 times forward earnings and eight times this year’s sales. Its price-to-earnings ratio may seem high for a company with declining profits, but its profits should rebound after integrating Slack. Meanwhile, its price-to-sell ratio still looks cheap compared to other cloud stocks with comparable revenue growth.

Therefore, I think Salesforce still offers an attractive balance of growth and value in this market, which has been difficult for higher-growth tech stocks that trade at foamy valuations. Concerns about Salesforce’s near-term earnings could weigh on the stock this year, but I believe it will continue to climb in the long term as it sets to double its annual revenue by 2026. .

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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