Enterprise software-as-a-service giant salesforce.com (NYSE:CRM) had the sort of year-ending performance that investors are supposed to love: Revenue was up by serious double-digit percentages for the quarter and the full year, it's getting more out of its biggest customers, and even the long-term guidance was optimistic. So why did shares fall in the wake of the report?
In this segment from MarketFoolery, host Chris Hill and analyst Abi Malin address what appear to be the core issues: a sense that management's outlook is overconfident, and that CEO Marc Benioff failed to adequately respond to analysts' concerns on the conference call. The duo also talk about the competition Salesforce faces from a host of niche players in the customer relationship management space, and how much of a premium the stock carries after almost doubling in the past two years.
A full transcript follows the video.
This video was recorded on March 5, 2019.
Chris Hill: Let's move on to earnings from Salesforce.com. Shares of Salesforce down a little bit. I'm assuming that's because of the guidance for Q1, because it looked like the fourth-quarter results were rock-solid.
Abi Malin: Fourth-quarter results were really good. Q4 revenues were about $3.6 billion, that was up 27% in constant currency. Full-year revenue was $13.2 billion. That was up 26% year over year. They had a lot of growth in their $20 million-plus customer relationships, up 48%. A lot of positive inertia behind them.
I think the challenge the market is having with this quarter is not necessarily the immediate guidance, but more long-term. Management raised their goal for 2023 revenues of $26 billion to $28 billion. That's implying about a 21% growth year over year at the high end. I feel like analysts were just maybe a little bit more skeptical of Salesforce's ability to do that. Management was questioned about it, and I didn't feel like their answers were necessarily addressing the exact questions that they were given.
Hill: I didn't listen to the call. Marc Benioff has done a great job leading this company. Certainly, if you're a shareholder of Salesforce --
Malin: You're happy.
Hill: You're happy. Even with the drop today, the stock's up nearly 30% over the last year. It's close to a double over the last two years. What was Benioff doing on this call? He has a track record, and between the average Wall Street analyst and Marc Benioff, given his track record, I'm going to side with Benioff. Unless he was just being completely obstinate on the call. [laughs]
Malin: No, he wasn't at all. I just think maybe he was being a bit opportunistic, maybe a little bit too confident. I mean, 21% growth year over year isn't outrageous for what they have done. They mentioned a lot that CRM, which is their specific space in the enterprise software market, is the fastest-growing of all software markets. This is really driven by the movement to cloud, the drastic digital transformation, and also their customer base. But, you've increasingly seen IT companies spend more on innovation rather than maintenance, which is where the primary spend was in the past. So, while those should be tailwinds for Salesforce, I think you're going to see a lot more competition in the space. Salesforce is doing everything correctly, I would say, but I think analysts are just more expectant of higher competition and more competition.
Hill: Who are some of the other competitors in this space? We throw the word "cloud" around a lot. There are so many businesses involved in one aspect or another. Who is Salesforce going up against? And, therefore, who's going to be the happiest if Salesforce just disappeared from the Earth?
Malin: That's a very wide net we're casting here. Salesforce is that classic software product suite. They do so many things that can solve so many issues for so many different customers that it's not necessarily that anyone has one product that is "Salesforce or X," but sometimes it's a variety of niche players that maybe do one aspect of something better than another. That's an advantage for them, obviously, because it's easier as a customer to have one relationship rather than multiple. But I don't think it's necessarily as stable or defensible as they are maybe presenting it to be.
Hill: Last thing on Salesforce before we move on. I mentioned the performance of the stock over the last couple of years. When you look at this on a valuation basis, is part of the skepticism from the analysts, "Hey, look, you've had a great run. You're not flying with the cheapest stock in the world."
Malin: I always expect that to be a consideration. We've seen the return of a little bit of volatility, especially in the tech space. I think it's been a long time coming. We're in a 10-year bull market now. It feels like there should be some coming back down to Earth, a realistic grounding, and I do think this is a really expensive stock. It always has been. So, again, not unjustified. I think they've done a phenomenal job. I just don't know how that's going to be looked at in the next five years.
Hill: By the way, for all of the headlines back in December, which was just three months ago, think about, people were running around with their hair on fire. You had some investors out there who just said, "Look, I've had a good run. I'm out." And, well, from the December 24th lows, the S&P 500 is up about 15% since then. That's why we try not to be traders.