Is Poised for Solid Growth

Big deals and a key acquisition can take Salesforce higher in the long run.

May 9, 2014 at 2:00PM

Shares of enterprise cloud computing solutions provider (NYSE:CRM) have fallen 5% this year despite the company's strong fourth-quarter report in late February. Salesforce has delivered terrific revenue and earnings growth in recent quarters in the face of competition from more established rivals such as Oracle (NYSE:ORCL) and SAP (NYSE:SAP). Its prospects also look bright, so investors can consider capitalizing on Salesforce's share price weakness in 2014 to buy more shares.

Rapid growth so far
In the previous fiscal year, Salesforce's revenue was up 33% year over year to $4.07 billion and non-generally accepted accounting principles earnings came in at $0.35 per share. The company's results were boosted by its $2.6 billion acquisition of ExactTarget. As a result of this acquisition, Salesforce bolstered its cloud business and was named Gartner's No. 1 customer relationship management, or CRM, software provider in terms of market share. 

Salesforce's growth trajectory should remain strong as the company has signed a large number of deals and is also focusing on innovation. Salesforce is focusing on various aspects to hold its competitive edge in the market. In the CRM space, Salesforce's fourth quarter included more than 200 transactions that were in seven figures or higher. According to management, none of its peers saw such a large transaction volume.

Driven by those lucrative deals, Salesforce increased its fiscal 2015 revenue guidance by $100 million to $5.3 billion, translating into an expected year-over-year growth rate of 30%. In addition, Salesforce expects to deliver a 125 -150 basis point improvement in non-GAAP profit. 

The way ahead looks bright
Salesforce's biggest strength has been its ability to meet customer demands. The company's Salesforce1 solution allows management teams globally to run their business on their mobile devices; Salesforce CEO Marc Benioff explained how he was able to track the business via only his iPhone while having dinner with a friend.

Salesforce has signed up more than 250 independent software vendors that will develop apps based on the Salesforce1 platform. More than 30 Salesforce1 apps such as Evernote, Dropbox, LinkedIn, and HP are available on its app exchange. 

Salesforce is also trying to leverage the ExactTarget acquisition to its advantage in a more effective manner. Having integrated the digital marketing automation and analytics software provider into its product portfolio to form the ExactTarget Marketing Cloud, the company now aims to build the world's most powerful customer platform for one-to-one marketing. 

According to Forrester, digital marketing spending is expected to double in five years and will represent 30% of total marketing spend by 2017. Salesforce intends to make the most of this expected growth through its ExactTarget acquisition by delivering a robust marketing platform. It is confident regarding the prospects of its Sales Cloud solution, which it claims to be the No. 1 platform for sales.

Better than Oracle, but SAP is making a move
It is on the back of such moves that Salesforce has been able to compete effectively against Oracle and SAP. Although Salesforce uses Oracle database as a part of its infrastructure, both companies are compete in the CRM space. Salesforce had 14% of the $18 billion CRM market in 2012, while Oracle trailed with an 11.1% share, according to Gartner. Although Gartner hasn't released the market share breakdown for 2013 yet, it is likely that Salesforce has extended its lead.

Salesforce's total 2012 revenue was $3 billion, and it increased to $4 billion in 2013. In the same time, the CRM market grew to $20 billion. So Salesforce now commands close to 20% of the market. It was the fastest-growing software company with more than 30% growth in annual revenue, while Oracle was sixth on the list with just 3.4% growth. Hence, Salesforce seems to be outperforming Oracle.

However, Salesforce needs to keep an eye on SAP, which is trying to disrupt the CRM market. SAP acquired Hybris last year, and it is looking to combine this acquisition with its own CRM software to tap the market. The Hybris acquisition has bolstered SAP's e-commerce, master data management, and application portfolio, which would allow customers to choose an e-commerce platform according to their needs. Also, Hybris brings product information management, content management, and order management to SAP's portfolio, and this could lead to an increase in the number of customers.

Salesforce is rapidly increasing its business as it is landing a number of lucrative deals. Its acquisition of ExactTarget has given it a strong foothold in the CRM industry. Salesforce expects robust growth this year, which is why investors should consider buying more shares on the stock's weakness.

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Sharda Sharma has no position in any stocks mentioned. The Motley Fool recommends The Motley Fool owns shares of Oracle.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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