Salesforce Stock: Why I have a Neutral Position Despite Platform Strengths

Salesforce Stock

Salesforce Stock (NYSE:CRM)

Salesforce (NYSE:CRM) has done much worse than the tech-heavy S&P 500 and the Nasdaq Composite over the past year. But so far this year, Salesforce stock has done better than either of these indices by at least 8%.

Bret Taylor, who was co-CEO for about a year, left the company, which caused the share price to drop by 5%. In this situation, the fact that the online CRM company is cutting jobs and that activist investor Elliott Management is buying a stake worth billions of dollars and supporting the other co-CEO, Marc Benioff, are both good things.

But this thesis aims to take it a step further and show that the company’s platform is strong, both in terms of margins and the way capital is spent. I talk about its platform strategy and how buying Slack, a company with an instant messaging program, has helped it in this regard.

The Story of Slack and the Platform

Contrary to what most people think, Salesforce sells more than just CRM software. It also sells its platform as a service. This is because when users log in through the portal to make marketing or customer relationship applications, they also imply that they are using Salesforce’s platform. Recently, low-code object-creator tools have made it possible for people to make apps straight from spreadsheets, where a lot of corporate data still lives.

This means that users can make automated workflows that can process data quickly (in real-time), for example, to speed up IT operations and save customers time and money. Also, by moving their data to the Salesforce platform, users can avoid time-consuming software installations and server provisioning, which are more expensive because of rising wages and higher equipment costs caused by the supply chain.

Ten countries, including the US, took part in a study in 2022 that found that using Salesforce’s ready-to-use platform can cut IT costs by 25%.

This is a lot of money, and it doesn’t even consider savings that could be made when testing and deploying applications at scale or intangible benefits like customer satisfaction.

Now, the platform strategy helps explain why Microsoft bought Slack for $27.7 billion in 2021. This may seem like a lot of money, but the fact that Salesforce uses the Slack instant messaging app keeps its customers from having to share data through Zoom (NASDAQ:ZM), Cisco’s (NASDAQ:CSCO) WebEx, or Microsoft’s (NASDAQ:MSFT) Teams. Slack’s analytics are now built into Salesforce to give users actionable information.

In today’s economy, when companies are looking for ways to cut costs while improving performance, these insights, based on data, are essential for making employees more efficient.

The New Way to Sell, the Challenges, and the Risks of Stock Volatility

Still, Salesforce has been having trouble since the second quarter of fiscal 2023, which has continued into the third quarter. Although its products are popular because they increase efficiency at a lower TCO (total cost of ownership), which is important in a business environment with high inflation and uncertainty. Because of this, customers ask more questions before putting money into projects, and deals are getting smaller and taking longer because there are so many levels of approval. Some big customers, like Veeva (NYSE:VEEV), have said they won’t renew their contracts when they run out in 2025.

The company has implemented a new sales plan to deal with the problem, which should help it deal with the headwinds. Still, analysts expect only 3.48% growth year-over-year for fiscal 2023, which ended in January. This is the lowest growth rate in the last ten years.

This means that when financial results are released in early February, Salesforce’s share price may be under pressure since the company has built its reputation by constantly innovating and growing at double-digit rates.

But the bottom line is also something to think about.

Because the company wants to make more money, it has decided to lay off about 8,000 people, or 10% of its global workforce. It will also use less land because a lot of it needs to be used to its full potential. Together, these two changes should save anywhere from $3 billion to $5 billion, which is less than 1% of the total $26.5 billion in sales for the fiscal year in 2022.

But this could just be the beginning. Pressure from activist investors could lead to more cuts, and the project to re-platform could lead to even more.

In this case, the company is trying to “aggressively consolidate” the infrastructure parts of these Salesforce acquisitions that are (at least partially) running on different platforms into a single one. This project is being led by Steve Fisher, who returned to Salesforce from FD Technologies in July 2021 and helped build its first platform. It has a good chance of being finished quickly, which could lead to big gains in gross margin because fewer infrastructure engineers will be needed to support operations.

This kind of project is part of IT integration, and the Gartner 2019 Business Application Integration Survey found that it can increase revenue by 10% and financial postings or margins by 20%. Even though this survey was done four years ago, it is still useful today, especially since labor costs are rising.

Investment and Valuations on the Capital-Light Platform

I get higher earnings per share of $6.39 (5.81×1.1) than the initial estimate of $5.81 by taking a more moderate stance because Salesforce’s platforms are already partially integrated and assuming only 10% margin gains for the fiscal year 2024, which ends in January of next year. Since earnings are a part of the price-to-earnings ratio, this makes the forward P/E lower at 23.99x (26.65 x 0.9).

This is less than Salesforce’s forward price-to-earnings ratio (GAAP), which is 24.46x. This could mean that Salesforce is undervalued, but it depends on how well the re-platforming project goes. So, this project would be in danger if the company sold off some of the companies it had bought in the past, like Tableau, Slack, or Mulesoft, because of pressure from activist investors.

This doesn’t make sense, though, because they should be worth much less than what they were sold for. In the same way, Elliott’s strategy, which we saw with Athenahealth five years ago and SAP SE (NYSE:SAP) more recently, is to speed up strategic actions that have already been planned and, in the worst case, to lobby for a change in the CEO position itself. Also, selling parts of Salesforce is not in the best interest of shareholders because it would reduce its huge TAM, or total addressable market, which is expected to grow from $13 billion in 2022 to $33.5 billion in 2029, or 14.4% CAGR.

Also, with a platform-based business that can run in private data centers and any public cloud anywhere in the world (thanks to Hyperforce), the online CRM pioneer can quickly, and with few assets, add new features for users worldwide. This is shown in the table below by how quickly annual sales grew while Salesforce grew and spent less on capital expenditures. This means that the FCF is high.

This means that the company has a business model that is financially sustainable and strategically placed between businesses that offer services and people or businesses that need assistance and are willing to pay for them.

Bottom Line

So, even though growing sales is complex, Salesforce can increase its margins by cutting costs and switching platforms. In this way, the company’s capital-light growth strategy is the same as the platform approach, which lets apps or new features being rolled out quickly without investing a lot in new IT infrastructures.

Also, activist investors are interested in the CRM company, which is a good sign. However, business appetite differs from 2021 and 2022, so you can expect volatility when the fourth quarter and full-year financial results come out in early February. Also, because its stock prices are higher than those in the IT sector, the stock could lose value if the Fed continues to be aggressive and investors move their money to more valuable names. Lastly, even though the platform is robust, I don’t have a strong opinion about Salesforce stock.

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About the author: Stephanie Bedard-Chateauneuf has over six years of experience writing financial content for various websites. Over the years, Stephanie has covered various industries, with a primary focus on tech stocks, consumer stocks, health stocks, and personal finance. This stock lover likes to invest for the long-term. Stephanie has an MBA in finance.