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Is Salesforce a Buy?

By Joe Tenebruso – Updated Apr 16, 2019 at 7:24AM

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The software-as-a-service star's stock has crushed the market thanks to years of strong business growth, but now the CRM leader's valuation is looking rather lofty. (CRM -2.06%) stock has delivered incredible gains to investors. In the years since its 2004 IPO, the cloud software leader's share price has surged by more than 3,600%. 

But with its shares trading near all-time highs, is Salesforce still a solid buy today?

A cloud inside a data center

Image source: Getty Images.

A strong competitive position

Salesforce is the world's leading supplier of cloud-based software that helps businesses sell and market their products, and serve and support their customers. By using a software-as-a-service model that allows customers to pay for those solutions by subscription -- rather than via up-front capital investments -- the company has helped to reshape the enterprise software industry.

An ever-expanding ecosystem surrounds and strengthens Salesforce's core offerings. Its partnership with Alphabet integrates Salesforce's customer relationship management solutions into Google Analytics, Gmail, and Google Calendar, among other other services. Another partnership with Apple makes it easier for developers to use Salesforce's platform to build apps for the iPhone and iPad. And an army of third-party developers has made thousands of apps available on Salesforce's AppExchange, thereby give it even greater functionality and value for the company's customers.

"Our thriving partner ecosystem is fueling our growth worldwide and making our customers more successful," said co-CEO Keith Block  during the company's fourth-quarter earnings call.

All told, Salesforce has positioned itself at the center of enterprise software development and cloud computing -- two massive global markets that should continue to grow rapidly.

Check out the latest earnings call transcript for

A company in growth mode

Thanks to these powerful drivers, Salesforce has become a $125 billion behemoth. Yet despite its size, the company continues to expand at an impressive rate. Revenue jumped 26% to more than $13 billion in fiscal 2019 (which ended Jan. 31). Management expects revenue to rise another 20% to $16 billion in fiscal 2020. Even more impressive is that the company believes it can double its revenue by 2023, solely through organic growth. "We continue to grow internationally, expand across industries, and leverage our partner ecosystem as we drive toward our new revenue target of $26 to $28 billion in FY23," Block said. 

Salesforce also has a history of making value-creating acquisitions. Its recent purchase of MuleSoft is looking particularly wise. MuleSoft's application integration technology has made Salesforce a valuable partner for businesses that want to transition their operations to run on cloud technology. This is a global megatrend that's still in its early innings, and that should continue to fuel Salesforce's growth for many years to come. "I recently spoke with the head of one of the largest consulting firms who said that roughly 85% of their top-50 customers are just getting started on their digital transformations," Block said. "So, clearly, that's an indication that we have tremendous runway ahead of us." 

Worth the price

Perhaps unsurprisingly, considering its strong competitive position and intriguing growth prospects, Salesforce's stock is priced at a premium. Shares currently trade for about 58 times analysts' earnings estimates for fiscal 2020. Salesforce, meanwhile, is projected to grow its earnings at an annualized rate of about 28% over the next five years. That puts the stock's price-to-earnings-to-growth (PEG) ratio at more than 2 -- a high valuation, even for a growth stock.

That said, Salesforce is the type of elite business that's worth paying up for. The company dominates the customer relationship management software industry, and it's rapidly expanding into other areas of the massive enterprise software market. Moreover, Salesforce could grow at above-average rates for decades; the company expects to reach $40 billion in annual revenue by 2028 and $60 billion in revenue by 2034. If it can get anywhere close to achieving these bold targets, shareholders should enjoy handsome gains, even from today's lofty levels. As such, Salesforce's stock is a solid buy for long-term investors.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, and The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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