salesforce.com (CRM 1.88%) has delivered stunning returns to investors over the past decade. But with its shares up a staggering 1,700% during this time -- and 30% already this year -- can the software titan continue to reward its shareholders from this point forward?
Read on to find out.
A dominant competitive position
Salesforce is the undisputed leader in customer relationship management software -- the biggest and fastest-growing segment in the massive enterprise software market. In fact, Salesforce's nearly 20% share of the global CRM market is more than that of its three closest competitors combined.
Moreover, Salesforce is widening its lead over its rivals. The company is growing at nearly twice the rate of the overall market, fueled by the popularity of its best-in-class sales, customer service, and marketing solutions.
Salesforce is taking share from its competitors. Image source: Getty Images.
Better still, Salesforce's share gains may accelerate in the coming years. The company's recent acquisition of MuleSoft provides it with another powerful competitive advantage: MuleSoft offers highly regarded data integration solutions, at a time when businesses are coming to recognize the need to combine and analyze data from many disparate sources.
"As more and more companies connect everything and everyone, they're realizing that integration is vital to their success and to their digital transformation, and now they're turning to Salesforce MuleSoft, the No. 1 integration cloud, to do it," co-CEO Marc Benioff said during the company's second-quarter conference call.
Stated simply, Salesforce is the dominant provider of CRM software, and it's poised to grow even more powerful in the years ahead.
Tremendous opportunities for growth
Despite years of strong gains, Salesforce has plenty of room for growth still ahead. Its trailing-12-month revenue of $11.8 billion makes up only about 3% of the $391 billion that businesses are expected to spend on enterprise software in 2018. Moreover, Gartner estimates that enterprise software spending will grow to more than $537 billion by 2021.
Thus, Salesforce gives investors the opportunity to invest in the dominant leader of the fastest-growing -- and increasingly vital -- segment in an enormous industry. And with its cloud-based software likely to remain in high demand for the foreseeable future, Salesforce should continue to expand its share of this massive market in the decade ahead.
A great company at a reasonable price
Salesforce's management has set an aggressive goal of nearly doubling its current revenue base by fiscal 2022. Incredibly, the company is on track to do just that, with revenue surging 27%, to $3.3 billion in the second quarter. "With this strong quarter, we're well on our way to our next milestone of $23 billion in revenue in FY22," co-CEO Keith Block said at the time.
Based on this revenue target, and using the company's five-year average free cash flow margin of 18% as our baseline estimate, Salesforce is likely to produce more than $4 billion in free cash flow in fiscal 2022. At its current $100 billion market cap, investors are therefore paying about 25 times this free cash flow estimate for Salesforce today.
If we instead use Salesforce's trailing-12-month free cash flow margin of 21.7%, our free cash flow estimate would rise to $5 billion. In this scenario, investors who buy shares today would be paying about 20 times this figure.
Old-school value investors may balk at paying 20 times the free cash flow a company may produce more than three years in the future, but this is not an entirely unreasonable price to pay for a dominant business that could legitimately grow its earnings and cash flow by more than 20% annually over the next decade.
It's also possible that these free cash flow estimates may prove conservative, particularly if Salesforce's margins continue to improve in the coming years. (Salesforce's operating margins have steadily expanded along with its revenue base in recent years.)
As such, I'd argue that Salesforce is a buy at current prices -- and that long-term investors who purchase shares today are likely to be well rewarded.
