CRM

Is Salesforce Stock a Buy Now?

Salesforce (NYSE: CRM), the cloud services giant that operates the world's largest customer relationship management (CRM) platform, posted its fourth-quarter earnings report on March 1.

Its revenue rose 26% year-over-year (27% in constant currency terms) to $7.33 billion, beating analysts' estimates by $80 million. Its adjusted net income declined 14% to $843 million, or $0.84 per share, which still cleared analysts' expectations by nine cents. On a generally accepted accounting principles (GAAP) basis -- which includes its stock-based compensation, acquisitions, and other one-time expenses -- Salesforce posted a net loss of $28 million, compared to a net profit of $267 million a year earlier.

A person works on a tablet.

Image source: Getty Images.

Salesforce's stock barely budged after the report, and it remains more than 30% below its all-time high of $311.75, which it hit just last November. Should investors accumulate some shares of this cloud giant today?

How fast is Salesforce growing?

In fiscal 2022, Salesforce generated 24% of its subscription and support revenue from its sales platform, 26% from its service segment, 18% from its platform and other segment (which houses its app development platform Lightning and Slack), and 16% from its marketing and commerce segment.

The data segment, which was recently separated from its platform and other business, generated 15% of its revenue. This segment houses the analytics platform Tableau and the integration software provider Mulesoft.

All five segments generated double-digit sales growth in the fourth quarter as well as the full year, and Salesforce's annual growth in subscription and support revenues remained comfortably above 20%.

Revenue Growth (YOY)

FY 2021

FY 2022

Sales

13%

15%

Service

20%

20%

Platform & Other

40%

36%

Data

75%

25%

Marketing & Commerce

25%

28%

Total Subscription & Support

25%

23%

Data source: Salesforce. YOY = Year-over-year.

Salesforce's current remaining performance obligation (RPO) -- which gauges the forward demand for its services -- rose 22% year-over-year (24% in constant currency terms) to $22 billion, which suggests it can continue to generate at least 20% annual sales growth in fiscal 2023.

Salesforce expects its revenue to grow 24% year-over-year in the first quarter of 2023 and 21% for the full fiscal year. Both of those estimates are higher than its previous forecasts from last November.

That confident guidance indicates that Salesforce is still on track to achieve its long-term goal of generating more than $50 billion in annual revenue in fiscal 2026, which would represent a compound annual growth rate (CAGR) of at least 17.4% from fiscal 2022 to 2026.

Challenging the bearish arguments

The bears frequently accuse Salesforce of relying too heavily on big acquisitions -- such as Tableau, Mulesoft, and Slack -- to pad its growth. They also claim that integrating too many businesses will squeeze its margins.

But during the conference call, chief operating officer Bret Taylor said that Salesforce didn't "have any plans for material M&A in the near term," and that its main focus would be on integrating Slack into its other services. Salesforce recently agreed to buy Traction on Demand, but it's a small company that will only add about $75 million to its fiscal 2023 revenue.

Salesforce also expects its GAAP operating margin to rise from 2.1% in fiscal 2022 to 3.6% in fiscal 2023, and for its non-GAAP operating margin to expand from 18.7% to "approximately 20%." That forecast implies that Salesforce doesn't expect to suffer any acquisition indigestion.

The outlook and valuations

Salesforce's stock trades at about six times its sales estimate for fiscal 2023. Adobe (NASDAQ: ADBE), which is growing at a slightly slower rate than Salesforce, still trades at 12 times this year's sales.

Salesforce expects its non-GAAP earnings per share to dip 3% in fiscal 2023, while analysts expect a 25% recovery in fiscal 2024.

Based on those expectations, Salesforce's stock trades at 45 times forward earnings. Adobe, which is expected to generate 10% earnings growth this year, trades at 33 times forward earnings.

Salesforce's stock isn't that cheap relative to its volatile profits, but I believe its forward price-to-sales ratio -- which seems very low relative to those of its cloud-based peers -- is a much better gauge of its value.

Salesforce's stock might be weighed down by near-term concerns about inflation, rising interest rates, and the Russian-Ukrainian war. However, I believe it still has plenty of room to rise over the long term as it locks more customers into its expanding ecosystem of cloud-based services. In short, I believe it's still a solid evergreen investment for patient investors.

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Leo Sun owns Adobe Inc. and Salesforce.com. The Motley Fool owns and recommends Salesforce.com. The Motley Fool recommends Adobe Inc. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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