Salesforce Inc. Fundamental Analysis
Disclaimer: This article by The Globetrotting Investor is general in nature. We aim to bring you long-term focused analysis driven by fundamental data, hence, providing you commentary based on historical data and analyst forecasts only using an unbiased methodology. This is not a buy/ sell recommendation, and it is solely for educational purposes. Please do your research before investing. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Please read the full disclaimer here.
Salesforce Inc.
Last Updated: 21 Sept 2023
NYSE: CRM
GICS Sector: Technology
Sub-Industry: Software—Application
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Table of Contents
You can download a summary of Salesforce Inc's fundamental analysis in PDF here.
Management
CEO: Marc Benioff
Tenure: 24.6 years
Salesforce, Inc's management team has an average tenure of 1.3 years. It is not considered experienced.
Source of Revenue
Salesforce Inc. provides Customer Relationship Management (CRM) technology. Its Customer 360 platform brings together sales, service, marketing, commerce, and IT teams by linking customer data across various systems and devices, allowing for a comprehensive understanding of customers.
This unified customer view enables teams to be more efficient and deliver personalized experiences across all channels, regardless of location.
Customer 360 service offerings are designed to work together and include:
Sales.
Salesforce's Sales offering helps sales teams manage their entire sales process, from leads to billing. Users can store data, track leads, make forecasts, and get insights. This tool also allows teams to work from anywhere, whether in the office, on the go, or at home, meeting the digital-first needs of customers.
Services.
Salesforce's Service offering helps companies deliver personalized customer service at scale. It connects service agents with customers through various channels and uses AI-powered chatbots for issue resolution. It also includes a field service solution for intelligent scheduling and job tracking.
Platform and Other.
Salesforce's Platform offering lets companies easily create custom apps to improve customer relationships. It also ensures trust, security, and compliance. Slack, another offering, enhances collaboration by connecting people and systems in real-time or asynchronously, whether in-person or remotely. It's seamlessly integrated into the Customer 360 platform.
Marketing and Commerce.
Salesforce's Marketing helps create personalized customer journeys across various channels. It integrates with Sales and Service for a unified customer view. The Commerce offering unifies shopping experiences across platforms and boosts engagement, conversion, and revenue. It provides flexible deployment options to adapt to changing customer needs.
Data.
Salesforce's Analytics with Tableau provides advanced analytics for various business needs, allowing for better understanding and efficient decision-making from any device.
The Integration offering, powered by MuleSoft, enables easy data connections between systems. It unlocks and secures data, increasing speed and agility for creating connected experiences and opening up new opportunities for revenue and customer experiences.
Other Customer 360 Service Offerings.
Salesforce provides specialized services to address specific business needs. Their Customer Data Cloud, called Genie, powers real-time, personalized experiences across sales, service, marketing, and commerce. Additionally, Salesforce offers Industry Vertical solutions tailored for sectors like finance, healthcare, manufacturing, and more. These solutions come with pre-built features, enabling businesses to swiftly respond to evolving customer demands and achieve value-driven outcomes.
The company operates as one business segment and sells its services globally, primarily through subscription-based models, both directly and indirectly through partners. Additionally, Salesforce allows third parties to leverage its platform and developer tools to create additional functionalities and applications that can be sold separately or in conjunction with their service offerings.
Salesforce makes money mainly from two sources: subscription and support, and professional services.
In 2023, about 93% of their revenue came from subscriptions and support. This includes fees for using their cloud services, selling software licenses, and providing support beyond the basics. Most of the revenue is earned over the contract period. They also earn from selling software licenses, but this makes up less than 10% of their total subscription and support revenue. The rate at which customers leave, known as attrition, was below 7.5% as of January 31, 2023. This helps maintain steady growth in their subscription and support income. In the future, including MuleSoft and Tableau in the calculation is expected to slightly increase attrition.
Salesforce Inc. Source of Revenue FY2023
Salesforce Inc. Revenue Geographic Breakdown FY2023
Salesforce Inc. Economic Moat
Salesforce Inc. Economic Moat
Economic Moat: Wide
There are many ways to identify Salesforce Inc.’s economic moat, but I focus on the above 5 types. The rating is purely subjective and based on my in-depth understanding and analysis of Salesforce Inc.. Please check my summary to understand more about the economic moat.
Performance Checklist
Is Salesforce Inc.’s revenue growing YoY for the past 5 years consistently? Yes.
Is the net income growing YoY for the past 5 years consistently? Inconsistent.
Is the cash flow from operating activities growing YoY for the past 5 years consistently? Yes.
Is the free cash flow positive for the past 5 years? Yes.
Is the gross margin % consistent/ growing for the past 5 years? Inconsistent.
Is the EPS growing for the past 5 years? No.
Salesforce Inc. Revenue, Net Income, Operating Cash Flow, and FCF (USD Million)
Is the free cash flow per share growing for the past 5 years? Yes.
Salesforce Inc. FCF per Share
Management Effectiveness
Is Salesforce Inc.’s ROE consistently at 12%-15% YoY for the past 5 years? No.
Salesforce Inc. Return on Equity
Is the ROIC consistently at 12%-15% YoY for the past 5 years? No.
Salesforce Inc. Return on Invested Capital vs Weighted Average Cost of Capital
The trendline for the number of shares outstanding is increasing, which is something that an investor would not be pleased to see.
Salesforce Inc. Shares Outstanding (Million Shares)
Salesforce Inc. Financial Health
Salesforce Inc. Financial Health (USD Million)
Current Ratio: 1.0 (pass my requirement of >1.0)
Debt-to-EBITDA: 1.5 (pass my requirement of <3.0)
Interest Coverage: N/A (pass my requirement of >3.0)
Debt Servicing Ratio: 4.0% (pass my requirement of <30.0%)
Dividend
Current Dividend Yield: Salesforce Inc. does not have a record of paying a dividend.
Salesforce Inc. Stock Performance
The graph below compares the cumulative total stockholder return on its common stock with the cumulative total return on the Nasdaq Computer & Data Processing Index ("Nasdaq Computer") and the Nasdaq 100 Index for each of the last five fiscal years ended 31 January 2023, assuming an initial investment of $100. Data for the Nasdaq Computer and Nasdaq 100 Index assume reinvestment of dividends.
Salesforce Inc. Stock Performance
Salesforce Inc. Intrinsic Valuation
Estimated intrinsic value: $181.33
Value is calculated using the discounted cash flow method (taking into account their cash and debt) and scenario planning.
Average free cash flow used: USD$6,000M
Projected growth rate: 10% - 20%
Beta: 1.2
Discount rate: 9.0%
Margin of safety: 30% (Uncertainty: Low)
Price range after the margin of safety: <$127.00
Date of calculation: 22 Sep 2023
Salesforce Inc. Valuation
Free cash flow used is a weighted average that is rounded to the nearest tens. In some instances, I used a more realistic number to represent the free cash flow.
Total debt and cash and short-term investments are last quarter figures that are rounded to the nearest tens. In some instances, I used more realistic numbers to represent them.
Salesforce Inc. Intrinsic Valuation
Salesforce Inc. Relative Valuation
Salesforce Inc. EV-to-EBITDA vs its peers
Salesforce Inc. Price-Earnings Ratio vs its peers
Salesforce Inc. Historical Price-Earnings Ratio
Additional Resources
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My Top Concern
Salesforce Inc. outlines its strategy of investing in and acquiring complementary businesses, technologies, and intellectual property. While these moves offer potential benefits, they come with significant risks.
These include security vulnerabilities, integration challenges, regulatory hurdles, cultural differences, and financial implications. The company acknowledges that these risks could adversely affect its operations and financial results.
Additionally, global trade tensions and increased scrutiny of foreign investments in the technology sector may further complicate acquisitions and investments, potentially impacting Salesforce's business and financial performance. The company may also face challenges in obtaining favourable financing terms for such endeavours, potentially affecting its stock value and ownership structure.
The integration of AI, particularly in the Customer 360 platform, introduces ethical considerations that could lead to controversy and harm the brand. Controversial data practices may hinder AI acceptance, impacting decision-making. Developing and deploying AI systems may also entail substantial costs, affecting profit margins. Ensuring ethical AI implementation will demand significant resources.
Summary for Salesforce Inc.
Salesforce Inc. revolutionized the software industry in 2000 with its web-based sales automation tool. It introduced features like process management, contact data, and territory tracking, which were innovative at the time. The company pioneered the idea of software as a service (SaaS) and then offered the product for sale.
SaaS gained popularity due to its advantages such as lower initial costs, no lengthy installations, automatic updates, and predictable expenses. SaaS vendors also benefited from steady income and avoided piracy issues. This new way of using software has been beneficial for everyone involved in today's software industry.
Salesforce Inc.'s wide economic moat is primarily due to intangible assets and switching costs, supported by a network effect.
In the customer relationship management (CRM) software industry, Salesforce holds a dominant position. They lead in salesforce automation with a 33% market share. Their Sales Cloud is highly esteemed for enhancing sales productivity and driving revenue. It is considered the flagship product in Salesforce.com's lineup.
The brand is also synonymous with reliability, innovation, and quality in CRM solutions.
Salesforce boasts an extensive customer base, encompassing a diverse range of businesses from various industries. The relationships and trust cultivated with these customers over time represent invaluable intangible assets.
Switching costs refer to the expenses, effort, and potential drawbacks associated with transitioning from one product, service, or provider to another. This includes factors like retraining, data migration, and lost productivity.
One formidable competitive advantage of Salesforce lies in its high switching costs. For example, the Service Cloud complements the Sales Cloud by offering similar features. It enables companies to deliver customer service and support on a large scale, a critical factor in attracting and retaining customers and driving revenue. Shifting from Service Cloud entails significant costs and risks, causing customers to be generally hesitant about making such a change.
Salesforce pioneered an early cloud-based platform for app development. It offered benefits similar to SaaS, integrated seamlessly with Salesforce's solutions, and allowed developers to market their apps on the AppExchange. This was an innovative concept that drew in numerous developers. Some companies even originated as apps on this platform. The popularity attracted developers, leading to the creation of more apps for various solutions. This sets off a positive cycle where more customers result in a larger audience on the AppExchange, making it more enticing for developers and generating a network effect.
Furthermore, Salesforce boasts a vast community of developers, administrators, and users who actively contribute to forums, blogs, and knowledge bases. This network effect establishes a rich resource for problem-solving, best practices, and innovation within the Salesforce ecosystem.
While Salesforce Inc.'s individual clouds are robust in their own way, it is the synergy of all their solutions that truly counts. These clouds complement each other seamlessly and are closely interconnected, rendering the complete package highly appealing. Customers prefer obtaining all their solutions from a single provider. This fortifies Salesforce's position and makes it more challenging for customers to switch. Offering a comprehensive range of top-quality solutions instils greater commitment in customers to utilize multiple Salesforce services.
Over the past five years, Salesforce Inc. has shown impressive performance in various financial areas. The company has consistently increased its revenue each year, which indicates healthy growth. However, there have been some fluctuations in the gross margin percentage, suggesting variability in their operational efficiency. Similarly, the net income has not followed a steady growth pattern, showing some inconsistency.
On a positive note, the cash flow from operating activities has consistently increased, highlighting the company's strong financial health. Additionally, Salesforce Inc. has maintained a positive free cash flow throughout the past five years, which shows its ability to generate extra cash beyond what's needed for operations. Furthermore, the free cash flow per share has consistently grown over this period, which is a positive sign of creating value for shareholders.
The management effectiveness of Salesforce Inc. over the past five years paints a mixed picture. The ROE has not stayed within a consistent range of 12% to 15% each year, indicating some variability in the company's ability to generate returns for shareholders. Moreover, Salesforce Inc.'s ROE is below the industry average, suggesting there is room for improvement compared to its peers. Similarly, the ROIC has not consistently met the 12% to 15% target over the past five years, indicating challenges in efficiently using invested capital. Notably, Salesforce Inc.'s ROIC is lower than its WACC, which may raise concerns about the company's ability to generate enough returns to cover its capital costs.
Furthermore, the trend of increasing outstanding shares is a concern for investors, as it can dilute their ownership stake and potentially affect earnings per share. This is a trend that investors may find worrisome.
Salesforce Inc. demonstrates a commendable level of financial health across several key metrics. With a current ratio of 1.0, the company meets the standard requirement of having a ratio greater than 1.0, indicating its ability to cover short-term obligations. Additionally, the debt-to-EBITDA ratio stands at a well-managed 1.5, showing the company's efficient handling of debt in relation to its earnings.
The debt servicing ratio, at 4.0%, is well below the 30.0% benchmark, further signifying Salesforce Inc.'s strong capacity to meet its debt obligations. Moreover, the company has a significant surplus of cash compared to its total debt, providing a robust buffer for any potential financial challenges. This healthy financial position indicates a solid foundation for sustained growth and stability in the foreseeable future.
Investing in Salesforce Inc. presents a unique opportunity, albeit with a discerning eye. The company boasts a wide economic moat, a robust competitive advantage that sets it apart in the dynamic tech landscape. However, it is crucial to acknowledge its unsatisfactory performance and less-than-ideal capital allocation in recent times. Despite this, Salesforce maintains a healthy balance sheet, providing a sturdy foundation for potential growth.
Yet, prospective investors must approach with caution, as there exists a notable degree of uncertainty surrounding its future trajectory. To mitigate risks, a prudent strategy would entail demanding a margin of safety of at least 30%. This buffer allows for a cushion against unforeseen challenges, providing a prudent approach to navigating the potential rewards and pitfalls that come with investing in Salesforce Inc.
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