Investors love a good growth stock. But that doesn't mean that sales growth alone is going to be enough for a stock to continue rising in value. Case in point: salesforce.com (NYSE:CRM). The customer relationship management platform developer is coming off a quarter in which it beat expectations for both earnings and sales, and yet that wasn't enough to give the stock a boost. Here's why investors may be expecting a lot more from the company and why it may not be that great of a buy today.

Acquisitions have played a big role for Salesforce -- perhaps too big

Salesforce has made as many as 60 acquisitions over the years, six of which occurred in 2019. In August, the company completed the purchase of Tableau for $15.7 billion, its largest acquisition to date. The move is a good one: Bringing in Tableau's analytics platform under Salesforce will help complement the company's existing capabilities.

Salesforce Co-CEO Keith Block stated in the press release, "Tableau will make Salesforce Customer 360, including Salesforce's analytics capabilities, stronger than ever, enabling our customers to accelerate innovation and make smarter decisions across every part of their business."

Bar chart showing numbers getting higher.

Image source: Getty Images.

The acquisition makes a lot of sense from a growth perspective as it's not hard to see how it can add significant value for Salesforce's existing customers by making customer analytics more in-depth and easier. The company is anticipating that Tableau will contribute $650 million in sales in fiscal 2020 and that sales growth for the year will hit 28%. Salesforce is optimistic of the value that will be added by the Tableau acquisition for its customers by adding more analysis into the picture.

"But when you combine that with all of the promise of the 360 degree view of the customer and being able to serve that up in an intelligent way and a visualized way, so we can process it, digest it, it's just a very compelling offering," Block stated on the company's earnings call. "So, and that's why the combination of Salesforce and Tableau we think will be very, very successful."  

The big question for investors is whether the addition of Tableau will be enough to improve Salesforce's profit margins in a meaningful way.

Profitability has improved, but margins are still very low

In fiscal 2016, Salesforce's operating profit was just $115 million on revenue of $6.7 billion, for a margin of just 1.7%. Fast-forward three years to the end of fiscal 2019 and those numbers jump to $13.3 billion in sales and an operating profit of $535 million, for an improved operating margin of 4%. 

Although that's a solid improvement -- Salesforce's operating income has more than quadrupled over three years -- it's still a very low percentage that doesn't leave a lot of room for error. And in recent quarters, the numbers haven't been nearly as strong. Compared to other analytics companies like Adobe and SAP, Salesforce has been lagging behind when it comes to operating margin:

CRM Operating Margin (TTM) Chart

CRM Operating Margin (TTM) data by YCharts

In the third quarter of fiscal 2020, Salesforce's income from operations totaled just $65 million despite revenue hitting $4.5 billion, putting its operating margin back at a tiny 1.4%. Marketing and sales costs continue to be a huge chunk of the company's expenses, accounting for 46% of revenue. By comparison, Adobe's sales and marketing expenses were 29% of its sales in fiscal 2019 , which is also inline with what SAP  has been averaging this fiscal year as well . Salesforce's numbers are down from a year ago when its percentage of sales and marketing expenses was around 47% of revenue, but it still needs to decrease even more if the company's bottom line is to get stronger.

A large part of the company's operating expenses were non-cash, with Salesforce recording $543 million via stock-based compensation expenses last quarter, which was up 55% year-over-year. 

The company's high valuation makes it difficult to justify buying the stock

Salesforce's earnings multiples can be unappealing given that the company hasn't always been able to consistently stay in the black. Currently, the stock has a price-to-earnings ratio of more than 130. Regardless of how much growth investors expect from the company in the future, that's a very expensive price to be paying for a company that hasn't been generating much profit.

The stock is also trading at more than nine times its sales and seven times book value. The company's PEG ratio, which factors in future earnings growth, is nearly three. For there to be good value for the growth, investors look for the PEG ratio to come in close to one. By comparison, SAP's PEG is at 1.7 while Adobe is higher at around two.  

Salesforce is significantly overpriced even though the stock has risen just 15% over the past year, well below the S&P 500's returns of 19% over the same period. Investors are starting to show some hesitation in buying Salesforce, and things could get worse if companies cut back on spending on sales and marketing amid tougher economic conditions. But even if that doesn't happen anytime soon, Salesforce's stock is still hard to justify buying at its current valuation.