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Salesforce: The Best Tech Investment in 2019?

By Daniel Sparks - Updated Apr 12, 2019 at 5:24PM

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One analyst predicts 30% upside for Salesforce stock.

Check out the latest Salesforce earnings call transcript.

Customer relationship management platform company Salesforce (CRM -0.77%) is the best tech investment in 2019, according to FBN Securities analyst Shelby Seyrafi (via Barron's). The analyst cites the company's strong growth and its software-as-a-service business model as some of the key reasons for the stock's attractiveness.

The generous endorsement of the stock comes after shares have been hammered amid a broader-market sell-off. Shares are down nearly 14% since Oct. 1 of last year. Is Seyrafi right to be so optimistic on the stock?

Salesforce chairman and Co-CEO Marc Benioff presenting at an event.

Image source: Salesforce.

A $180 12-month price target

Seyrafi has called for a 12-month price target of $180 and an outperform rating for the stock and believes there's significant upside ahead for the software-as-a-service company. This price target represents 30% upside compared to Salesforce's approximate $138 price at the end of the trading day on Friday.

Salesforce will earn this valuation through 21% year-over-year revenue growth in fiscal 2020, driven by continued growth across its various cloud offerings, as well as with the help of strategic acquisitions, the analyst believes. Seyrafi is particularly bullish on Salesforce's service cloud, which is closing in on its sales cloud in terms of quarterly revenue.

Highlighting the company's momentum, the company saw double-digit year-over-year revenue growth in every cloud offering in its third quarter of fiscal 2019. 

Cloud Service Offering

Q3 2019

Q3 2018*

Change

Sales cloud

$1,020 million

$921 million

10.7%

Service cloud

$917 million

$738 million

24.3%

Salesforce platform and other

$742 million

$491 million

51.1%

Marketing and commerce cloud

$489 million

$356 million

37.4%

Data source: Salesforce's third-quarter fiscal 2019 earnings release. Table by author. Fiscal years shown. *Adjusted to reflect Salesforce's recent adoption of Topic 606 accounting methods. 

Also supporting Seyrafi's bullishness on the stock is a thesis that the company's software-as-a-service business model makes the stock less susceptible to any negative effects of trade wars or decelerated growth in China.

Strong growth ahead

Seyrafi's underlying assumption for 21% revenue growth in fiscal 2020 not only seems doable, but even conservative. Management guided for fiscal 2020 revenue to rise 20% to 21% year over year to between $15.9 billion and $16.0 billion. Salesforce is notorious for overshooting its guidance and repeatedly raising its full-year outlook, so it wouldn't be surprising to see the company grow at a faster rate than what Seyrafi is modeling for. Indeed, revenue is currently growing at a much faster rate than this projection. Revenue in the company's most recent quarter jumped 26% year over year.

Of course, investors should never rely on an analyst's forecast or price target for their investment thesis, opting instead to do their own due diligence on the stocks they're interested in. But Seyrafi makes some good points about the company's strong momentum and its resilient business model.

Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Salesforce.com. The Motley Fool has a disclosure policy.

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Salesforce, Inc. Stock Quote
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