Salesforce stock analysis. CRM stock.
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The company’s market cap is around $183 billion, and once we adjust for the cash of $7 billion and long-term debt of $9,4 billion, the enterprise value is roughly $185 billion. This puts quite a high multiple if we compare this to the operating profit mentioned above.
The growth ahead is expected to be above 10%, which is still impressive, but the company is likely to focus more on expanding the margin by cutting the marketing & sales as the large expenses will be less and less justified as the company grows larger.
If we take a look at other companies that are selling software, such as Adobe, Autodesk, and Oracle, we can expect operating margins between 20% and 30%, which is a significant increase from the current levels.
Historically, the majority of the cash flow has been used to acquire new companies that could broaden the offering and add value. However, recently the company started returning part of the excess cash to the shareholders via share buybacks, which indicates that the management believes the company is undervalued. Whether that is the case or not, depends on the company’s ability to improve the margins in the coming years.
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Visit our Substack for more: https://www.overlookedalpha.com
The company’s market cap is around $183 billion, and once we adjust for the cash of $7 billion and long-term debt of $9,4 billion, the enterprise value is roughly $185 billion. This puts quite a high multiple if we compare this to the operating profit mentioned above.
The growth ahead is expected to be above 10%, which is still impressive, but the company is likely to focus more on expanding the margin by cutting the marketing & sales as the large expenses will be less and less justified as the company grows larger.
If we take a look at other companies that are selling software, such as Adobe, Autodesk, and Oracle, we can expect operating margins between 20% and 30%, which is a significant increase from the current levels.
Historically, the majority of the cash flow has been used to acquire new companies that could broaden the offering and add value. However, recently the company started returning part of the excess cash to the shareholders via share buybacks, which indicates that the management believes the company is undervalued. Whether that is the case or not, depends on the company’s ability to improve the margins in the coming years.
#stocks #investing #overlookedalpha #stockstowatch
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NewsTranscript
00:00 Should you buy Salesforce stock? Salesforce offers software solutions that support
00:05 employees at various positions in a company. Right now the company has a market cap of $183 billion,
00:11 with $7 billion in cash and $9.4 billion in debt. The balance sheet is healthy and the
00:17 enterprise value is roughly $185 billion. Revenue over the last 12 months is $31 billion,
00:24 net income is $208 million and free cash flow is $6.3 billion. So Salesforce is valued at almost
00:30 6 times revenue, 900 times earnings or 29 times free cash flow. Over the years Salesforce has
00:38 built an amazing ecosystem through internal research and development but also through
00:43 acquisitions such as Slack, ExactTarget, Tableau, Datorama, MuleSoft and many more. In fact,
00:50 revenue has grown at a compounded rate above 25% for the last decade which is best in class.
00:56 Since their offerings are intangible, CRM is able to scale up investments quickly
01:02 and maintain high gross margins above 70%. However, operating expenses remain significant,
01:08 marketing and sales make up 43% of revenue and R&D makes up 16%. All of these combined expenses
01:16 leaves the company with a tight operating margin of roughly 6% or close to $1.9 billion of operating
01:23 income. That explains the low earnings in relation to revenue as well. Historically,
01:28 the majority of cash flow has been used to acquire new companies that could broaden the
01:32 offering and add value. However, recently the company started returning part of the excess cash
01:37 via share buybacks which indicates that the management believes the company is undervalued.
01:44 Whether that's the case or not depends on the company's ability to improve margins in the
01:48 coming years and the CEO continues to sell regular quantities of the stock.
01:52 Growth ahead is expected to be above 10% which is still impressive and if margins improve then the
01:59 stock could grow into its valuation. But if you assume free cash flow grows at 10% per year for
02:05 the next 10 years and then the stock trades at the same multiple of 30 times free cash flow,
02:10 the company would be worth around $500 billion in 10 years time and that works out to an investment
02:15 return of only 10% per year. So Salesforce is a great company and a great business but the shares
02:21 look pretty fairly valued. There are certainly worse stocks out there to buy right now but I
02:26 currently give the company a neutral rating. But these are my personal opinions, not financial
02:30 advice and I've got no position in CRM stock. For more detailed investing ideas, visit our website
02:36 overlookedalpha.com