Thematic evaluation
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Salesforce, Inc. (CRM)

September 06, 2024

Compared to: Microsoft Corp. (MSFT) | Adobe, Inc. (ADBE) | Technology Select Sector SPDR Fund (XLK)

Our reasoning

Salesforce appears moderately undervalued based on its strong financial performance, market leadership in CRM, and growth prospects, particularly with the Agentforce platform. The company's valuation multiples, such as EV/EBITDA, are attractive compared to industry averages, and its improving profitability and cash flow generation are not fully reflected in the current stock price.

Key takeaways
  • Salesforce is a global leader in the CRM market, with strong revenue growth and profitability.
  • The company's financial position is strong, with high levels of cash flow generation and a conservative capital structure.
  • Salesforce's efficiency is high, as evidenced by its expanding margins and its ability to control operating expenses.
  • The company's future outlook is positive, driven by the increasing adoption of cloud-based CRM solutions, the company's expansion into new markets, and its commitment to innovation and product development.
  • However, Salesforce faces several risk factors, including cybersecurity breaches, the inability to successfully integrate acquired companies, and the failure to keep pace with technological developments.
  • The company's declining intangible assets could be a red flag, as it may indicate a decrease in the value of its intellectual property or a shift in its business model.
  • The company's high level of stock option compensation expense could be a concern, as it can dilute shareholder value.
  • The introduction of the Agentforce platform is expected to drive future revenue growth, margin expansion, and cash flow growth, as it is expected to increase sales and improve operational efficiency.
Undervalued
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Evaluation summary

  1. Company Overview:

    • Salesforce, Inc. (CRM) is a leading provider of cloud-based enterprise software, specializing in customer relationship management (CRM) solutions. The company's core business model revolves around offering a suite of integrated applications that cater to various aspects of customer engagement, including sales, service, marketing, commerce, and analytics.
    • Salesforce's revenue is primarily generated through subscription and support services, accounting for approximately 93% of total revenue. The company's product portfolio includes Sales Cloud, Service Cloud, Marketing Cloud, Commerce Cloud, Platform, Slack, and Data Cloud.
    • Salesforce targets a wide range of customers, from small and medium businesses to large enterprises across diverse industries globally. The company faces competition from established players in the enterprise software market, including vendors of packaged business software, cloud computing application providers, and companies offering free or low-cost solutions.
    • For comparative analysis, we are using the Technology Select Sector SPDR Fund (XLK) as a benchmark and Microsoft Corp. (MSFT) and Adobe, Inc. (ADBE) as industry peers.

  2. Financial Performance:

    • Salesforce has demonstrated consistent revenue growth over the past few years, driven by the increasing adoption of cloud-based CRM solutions and the company's expansion into new markets. However, revenue growth has been decelerating in recent quarters, likely due to macroeconomic headwinds.
    • The company's profitability is strong, as evidenced by its high return on assets (ROA), return on equity (ROE), and return on invested capital (ROIC). These ratios have been improving in recent quarters, indicating that Salesforce is effectively using its assets to generate profits.
    • Salesforce's profitability is significantly above the industry average, highlighting its leadership position in the CRM market. However, compared to MSFT, CRM's profitability metrics are lower, suggesting that MSFT may be more efficient in its operations.
    • Salesforce's net profit margin has been consistently above 15%, indicating strong profitability. However, compared to MSFT, CRM's net profit margin is lower, suggesting that MSFT may be more efficient in managing its costs.

  3. Operational Efficiency:

    • Salesforce's balance sheet analysis reveals a strong liquidity position, with a current ratio consistently above 1.0, indicating sufficient current assets to cover short-term obligations. However, the company's liquidity is slightly below the industry average, suggesting a more conservative approach to working capital management.
    • The company's working capital analysis shows a mixed trend, with fluctuations in working capital levels. This suggests that Salesforce may need to optimize its working capital management to improve efficiency.
    • Salesforce generates significant cash flow from its operations, with a strong free cash flow margin. This indicates that the company is effectively converting revenue into cash and has ample resources for debt repayment, dividend growth, and investment in organic growth opportunities.
    • The company's asset quality assessment reveals a high level of intangible assets, which could be a potential risk factor if the value of these assets declines.
    • Salesforce's capital expenditure (CAPEX) has been relatively stable, while depreciation trends have been consistent. This suggests a balanced approach to investing in its infrastructure and maintaining its asset base.
    • The company's dividend and share repurchase activities are relatively modest, suggesting a focus on reinvesting cash flow back into the business for growth.
    • Compared to its peers, Salesforce's operational efficiency is high, as evidenced by its strong gross profit margin, operating margin, and EBITDA margin. However, MSFT's operational efficiency metrics are higher, indicating that MSFT may be more efficient in managing its costs.

  4. Growth Opportunities:

    • Salesforce is actively expanding its market reach through strategic acquisitions, geographic expansion, and product innovation. The company has a strong track record of successful acquisitions, such as Slack, which have expanded its capabilities and market presence.
    • Salesforce's R&D pipeline is robust, with a focus on developing AI-powered solutions and enhancing its existing product offerings. The company's commitment to innovation is evident in its recent introduction of the Agentforce platform, an AI-powered enterprise software solution designed to automate and augment customer-facing workflows.
    • The company's geographic expansion plans are focused on emerging markets with high growth potential. Salesforce is also actively pursuing industry-specific solutions to cater to the unique needs of different sectors.
    • Salesforce's strategic focus areas include expanding its multi-cloud offerings, leveraging AI and automation, and enhancing its customer experience. The company is making significant progress on these initiatives, as evidenced by the strong performance of its Data Cloud and the introduction of Agentforce.
    • Salesforce's capital allocation strategies are aligned with its growth objectives, with a focus on investing in organic growth opportunities, strategic acquisitions, and product development.

  5. Risks and Threats:

    • Salesforce faces several risks, including cybersecurity breaches, the inability to successfully integrate acquired companies, and the failure to keep pace with technological developments.
    • The company's high level of intangible assets could be a red flag, as it may indicate a decrease in the value of its intellectual property or a shift in its business model.
    • Salesforce is exposed to fluctuations in foreign currency exchange rates and global macroeconomic conditions, which could impact its financial performance.
    • The company faces intense competition from established players in the enterprise software market, which could erode its market share and profitability.
    • Evolving data privacy and industry-specific regulations could increase compliance costs and impact customer adoption.

  6. Valuation Analysis:

    • Salesforce's valuation metrics, such as P/E ratio and EV/EBITDA, are generally in line with its peers, suggesting that the company is fairly valued relative to its industry. However, compared to MSFT, CRM's valuation metrics are lower, suggesting that MSFT may be more highly valued by the market.
    • The introduction of the Agentforce platform and the company's strong financial performance are potential catalysts for future growth and valuation expansion.

  7. Price Performance:

    • Salesforce's stock price has generally underperformed the Technology Select Sector SPDR Fund (XLK) over the past three years, with significant underperformance in periods like 6 months, 1 year, and 3 years. However, CRM has outperformed XLK in periods like 1 week and 2 years. This suggests that CRM's performance is less consistent than XLK's.
    • CRM has exhibited significantly higher annualized volatility than XLK, indicating that CRM's price movements are more unpredictable and potentially riskier.
    • CRM has experienced significantly larger maximum drawdowns than XLK, indicating that CRM is more susceptible to significant price declines. This further reinforces its higher risk profile.
    • Compared to its peers, CRM has generally underperformed MSFT in terms of both absolute returns and risk-adjusted returns. However, CRM has outperformed ADBE in some periods, particularly in terms of annualized returns.
    • CRM's higher volatility and larger drawdowns indicate a higher risk profile compared to its peers.

  8. Future Outlook:

    • Salesforce's management guidance for fiscal '25 is positive, with expectations for continued revenue growth, margin expansion, and cash flow growth. The company's focus on AI and automation, as evidenced by the Agentforce platform, is expected to drive future growth.
    • Analyst estimates for Salesforce's future performance are generally positive, with consensus expectations for continued revenue growth and profitability.

  9. Summary:

    • Salesforce is a leading provider of cloud-based enterprise software, with a strong financial position, high levels of cash flow generation, and a focus on profitability. The company's future outlook is positive, driven by the increasing adoption of cloud-based CRM solutions, the company's expansion into new markets, and its commitment to innovation and product development.
    • However, Salesforce faces several risk factors, including cybersecurity breaches, the inability to successfully integrate acquired companies, and the failure to keep pace with technological developments.
    • The company's declining intangible assets could be a red flag, as it may indicate a decrease in the value of its intellectual property or a shift in its business model.
    • The company's high level of stock option compensation expense could be a concern, as it can dilute shareholder value.
    • The introduction of the Agentforce platform is expected to drive future revenue growth, margin expansion, and cash flow growth, as it is expected to increase sales and improve operational efficiency.
    • Overall, Salesforce is a well-positioned company with strong growth potential, but investors should be aware of the risks associated with its business model and the competitive landscape.
Peer fundamentals 
Fundamentals
Insights
  • Salesforce is a global leader in the CRM market, with strong revenue growth and profitability.
  • The company's financial position is strong, with high levels of cash flow generation and a conservative capital structure.
  • Salesforce's efficiency is high, as evidenced by its expanding margins and its ability to control operating expenses.
  • The company's future outlook is positive, driven by the increasing adoption of cloud-based CRM solutions, the company's expansion into new markets, and its commitment to innovation and product development.
  • However, Salesforce faces several risk factors, including cybersecurity breaches, the inability to successfully integrate acquired companies, and the failure to keep pace with technological developments.
  • The company's declining intangible assets could be a red flag, as it may indicate a decrease in the value of its intellectual property or a shift in its business model.
  • The company's high level of stock option compensation expense could be a concern, as it can dilute shareholder value.
  • The introduction of the Agentforce platform is expected to drive future revenue growth, margin expansion, and cash flow growth, as it is expected to increase sales and improve operational efficiency.
Analysis
  • Revenue - Salesforce's revenue growth has been consistently strong, driven by the increasing adoption of cloud-based CRM solutions and the company's expansion into new markets. - The company's revenue growth has been decelerating in recent years, but it remains significantly above the industry average. - The company's revenue growth is expected to continue, driven by the increasing adoption of cloud-based CRM solutions and the company's expansion into new markets.
    • Profitability
      • Salesforce's profitability is strong, as evidenced by its high return on assets, return on equity, and return on invested capital. The company is effectively using its assets to generate profits.
      • The company's profitability has been improving, as evidenced by the increasing trends in these ratios.
      • Salesforce's profitability is significantly above the industry average, indicating that the company is a leader in its industry.
    • Liquidity
      • Salesforce's liquidity position is strong, as evidenced by its current ratio above 1.0. The company has sufficient current assets to cover its short-term obligations.
      • The company's liquidity has been relatively stable, as evidenced by the flat trend in the current ratio.
      • Salesforce's liquidity is slightly below the industry average, suggesting that the company may be more conservative in its management of working capital.
    • Solvency
      • Salesforce's solvency is strong, as evidenced by its low debt-to-equity ratio and high debt coverage ratio. The company has a low level of financial leverage, suggesting a conservative approach to financing.
      • The company's solvency has been improving, as evidenced by the decreasing trend in the debt-to-equity ratio and the increasing trend in the debt coverage ratio.
      • Salesforce's solvency is significantly above the industry average, indicating that the company is in a strong financial position.
    • Operational Efficiency
      • Salesforce's efficiency is high, as evidenced by its strong gross profit margin, operating margin, and EBITDA margin. The company is effectively managing its costs and generating profits.
      • The company's efficiency has been improving, as evidenced by the increasing trends in these ratios.
      • Salesforce's efficiency is significantly above the industry average, indicating that the company is a leader in its industry.
    • Cash Flow Analysis
      • Salesforce's cash flow is strong, as evidenced by its high level of operating cash flow and free cash flow generation. The company is generating significant cash from its operations and has ample resources for debt repayment, dividend growth, and investment in organic growth opportunities.
      • The company's cash flow has been increasing, driven by strong revenue growth and improving profitability.
      • Salesforce's cash flow is significantly above the industry average, indicating that the company is a leader in its industry.
    • Risk Factors
      • Salesforce faces several risk factors, including cybersecurity breaches, the inability to successfully integrate acquired companies, and the failure to keep pace with technological developments.
      • The company's declining intangible assets could be a red flag, as it may indicate a decrease in the value of its intellectual property or a shift in its business model.
      • The company's high level of stock option compensation expense could be a concern, as it can dilute shareholder value.
    • Future Outlook
      • Salesforce's future outlook is positive, driven by the increasing adoption of cloud-based CRM solutions, the company's expansion into new markets, and its commitment to innovation and product development.
      • The company's strong financial position, high level of cash flow generation, and focus on profitability position it well for continued growth and success.
      • The introduction of the Agentforce platform is expected to drive future revenue growth, margin expansion, and cash flow growth, as it is expected to increase sales and improve operational efficiency.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-09-04)
Technology Select Sector SPDR Fund (XLK)
  • Performance Comparison:
    • CRM has generally underperformed XLK over the past three years, with significant underperformance in periods like 6 months, 1 year, and 3 years. However, CRM has outperformed XLK in periods like 1 week and 2 years. This suggests that CRM's performance is less consistent than XLK's.
  • Risk and Return Analysis:
    • CRM has provided lower annualized returns than XLK over the past three years. This suggests that XLK has been a more profitable investment.
    • CRM has exhibited significantly higher annualized volatility than XLK, indicating that CRM's price movements are more unpredictable and potentially riskier.
    • CRM has experienced significantly larger maximum drawdowns than XLK, indicating that CRM is more susceptible to significant price declines. This further reinforces its higher risk profile.
  • Risk-Adjusted Performance:
    • XLK has consistently offered a better risk-adjusted return than CRM, as evidenced by its higher Sharpe ratio. This suggests that XLK has been a more efficient investment, generating higher returns for the level of risk taken.
    • CRM's beta values consistently above 1 suggest that it is more sensitive to market fluctuations than the overall market, indicating a higher risk profile. This is consistent with its higher volatility and larger drawdowns.
  • Overall Assessment:
    • CRM has generally underperformed XLK in terms of both absolute and risk-adjusted returns. CRM's higher volatility and larger drawdowns indicate a higher risk profile, which has not been compensated for by higher returns.
    • While CRM has outperformed XLK in some shorter periods, its overall performance has been less consistent. This suggests that XLK may be a more reliable investment option for investors seeking a balance of risk and return.
    • Investors considering CRM should carefully assess their risk tolerance and investment goals. CRM's higher risk profile may not be suitable for all investors, particularly those seeking a more stable and predictable investment.
Peers Price History(as of 2024-09-04)
Microsoft Corp. (MSFT)Adobe, Inc. (ADBE)
  • Performance Comparison:
    • CRM has generally underperformed MSFT over the past three years, with the exception of the 2-year period where CRM's performance was slightly better. However, CRM has outperformed ADBE in most periods, particularly in the 1-year and 2-year periods.
    • CRM's performance has been inconsistent relative to its peers, with periods of both outperformance and underperformance.
  • Risk and Return Analysis:
    • CRM has provided lower annualized returns than MSFT in all three periods. However, CRM has provided higher annualized returns than ADBE in the 2-year and 3-year periods.
    • CRM has exhibited higher annualized volatility than both MSFT and ADBE, indicating a higher level of risk associated with CRM.
    • CRM's maximum drawdown has been significantly larger than both MSFT and ADBE, indicating a higher risk profile. This suggests that CRM is more susceptible to market downturns and could experience larger losses during periods of market volatility.
  • Risk-Adjusted Performance:
    • CRM's Sharpe ratio has been lower than MSFT's, indicating that MSFT has been offering better risk-adjusted returns. However, CRM's Sharpe ratio has been higher than ADBE's in some periods, suggesting that CRM has outperformed ADBE on a risk-adjusted basis during those periods.
    • CRM's beta value has been higher than both MSFT and ADBE, indicating that CRM is more sensitive to market movements. This suggests that CRM's price is likely to fluctuate more than MSFT and ADBE during periods of market volatility.
  • Overall Assessment:
    • CRM has generally underperformed MSFT in terms of both absolute returns and risk-adjusted returns. However, CRM has outperformed ADBE in some periods, particularly in terms of annualized returns.
    • CRM's higher volatility and larger drawdowns indicate a higher risk profile compared to its peers.
    • Investors considering CRM should be aware of its higher risk profile and potential for larger losses during market downturns.
    • CRM's higher beta suggests that it is more sensitive to market movements, which could be both an opportunity and a risk for investors.
Peers Fundamentals(as of 2024-07-31)
Microsoft Corp. (MSFT)Adobe, Inc. (ADBE)

  1. Market Position and Size:

    • CRM is a mid-sized player in the "Technology Services" sector and "Packaged Software" industry, with a market capitalization significantly smaller than its peers, Microsoft Corp. (MSFT) and Adobe, Inc. (ADBE).
    • CRM's revenue and EBITDA are smaller than MSFT's but larger than ADBE's, indicating a mid-sized position within the peer group.
    • CRM's net income is significantly smaller than both peers, suggesting a lower profitability level.

  2. Profitability and Efficiency:

    • CRM's profitability metrics, including Gross Profit Margin, EBITDA Margin, and Net Profit Margin, are generally lower than both peers and industry averages, indicating a less efficient conversion of revenue into profit.
    • CRM's efficiency in generating returns, as measured by Return on Average Assets, Return on Average Total Equity, Return on Average Total Capital, and Return On Average Invested Capital, is significantly lower than its peers, suggesting a potential need for improvement in asset utilization or capital allocation.

  3. Financial Health and Stability:

    • CRM's liquidity position is generally healthy, with a Current Ratio and Quick Ratio above 1.0, indicating a healthy ability to meet short-term obligations.
    • CRM's debt levels are higher than its peers, as indicated by its Debt / EBITDA ratio, potentially indicating a higher risk profile.
    • CRM's balance sheet structure is more conservative than its peers, with a lower level of debt and a higher proportion of equity, suggesting a more sustainable long-term strategy.

  4. Valuation and Market Perception:

    • CRM's valuation metrics, including Enterprise Value To Sales, Enterprise Value To EBITDA, Price To Earnings, Price to Book Ratio, and Price To Sales Ratio, are generally lower than its peers, indicating a potentially lower market perception of its growth potential or future profitability.
    • CRM's lower valuation metrics, despite its smaller size, suggest a potential undervaluation by the market.

  5. Cash Flow and Capital Management:

    • CRM's cash flow generation is significantly lower than its peers, indicating a potential need for improvement in its operating efficiency or capital allocation.
    • CRM's lower cash flow generation, despite its smaller size, suggests a potential weakness in its ability to convert earnings into cash flow.

  6. Growth and Future Prospects:

    • CRM shows consistently higher growth in net income, basic earnings per share, and free cash flow compared to the peer group average.
    • CRM shows consistently lower growth in total assets and book value per share compared to the peer group average.
    • CRM's growth is concentrated in profitability metrics, with higher growth in net income, basic earnings per share, and free cash flow compared to revenue growth.
    • CRM's growth profile is mixed, with strong growth in profitability metrics but slower growth in revenue and assets.
    • CRM's growth in profitability metrics without corresponding revenue growth could be a potential red flag, suggesting a potential unsustainable growth trajectory.

  7. Potential for Investment:

    • CRM's investment attractiveness is mixed, with potential advantages and disadvantages.
    • CRM's strong growth in profitability metrics and conservative balance sheet structure suggest a potential for future growth and stability.
    • CRM's lower profitability margins, efficiency metrics, and cash flow generation, as well as its slower revenue growth, raise concerns about its long-term sustainability and competitive position.
    • CRM's relatively low valuation compared to its peers suggests a potential undervaluation by the market, but this could also reflect investor concerns about its financial performance.

  8. Key Risks and Considerations:

    • CRM's lower profitability margins and efficiency metrics compared to its peers raise concerns about its ability to maintain its growth trajectory and compete effectively in the long term.
    • CRM's slower revenue growth compared to its peers suggests a potential need for improvement in its market share or growth strategy.
    • CRM's higher debt levels compared to its peers, despite its smaller size, indicate a higher risk profile and potential vulnerability to economic downturns.

  9. Overall Assessment:

    • CRM is a mid-sized player in the "Technology Services" sector and "Packaged Software" industry with a mixed financial profile.
    • CRM exhibits strong growth in profitability metrics but faces challenges in revenue growth, efficiency, and cash flow generation.
    • CRM's conservative balance sheet structure and relatively low valuation suggest potential for future growth and stability, but investors should carefully consider the company's financial performance and competitive position before making investment decisions.