Please ensure Javascript is enabled for purposes of website accessibility

Get Ready to Buy the Salesforce Post-Earnings Dip

By Nicholas Rossolillo – Jun 2, 2020 at 9:15AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The start of 2020 was good, and shareholders can’t complain much about guidance with a recession underway.

Shares of salesforce.com (CRM 1.51%) stumbled immediately following its first-quarter results. It wasn't that the start to 2020 got off on the wrong foot. On the contrary, the months leading up to and during the start of the COVID-19 crisis were exceptionally good. But second-quarter and full-year fiscal 2021 guidance (the 12 months ending Jan. 31, 2021) got an all-but-unheard-of downgrade from CEO Marc Benioff and company.

But even a downgraded outlook for Salesforce would be a banner period for most other mega-cap companies. This software giant is proving that -- even in lean times -- it is an essential ingredient of many organizations' operational needs.

An illustration shows a man in a suit holding a tablet projecting a 3D image of a brain made up of silicon circuits.

Image source: Getty Images.

Acquisitions provide another quarterly boost

After growing revenue 29% in fiscal 2020, Salesforce got its new year started on the right foot with another 30% increase. Acquisitions, including the takeover of data analytics outfit Tableau over the summer of 2019 and MuleSoft in 2018 (both now part of the "Platform" segment), provided another boost. But even the company's large core proficiencies centered on its Sales and Service Cloud continued to grow at a fast pace in the months leading up to and during the start of the economic downturn.  

Segment

Three Months Ended April 30, 2020

YOY Increase

Sales cloud

$1.25 billion

16%

Service cloud

$1.25 billion

23%

Platform and other

$1.36 billion

62%

Marketing and commerce cloud

$714 million

27%

YOY=Year over year. Data source: Salesforce.com.  

The rate of growth is impressive considering the current global situation, and it underscores just how important the software firm has become to many organizations' efforts to adapt with the times. Among the highlights from the start of the year was the announcement that AT&T (T 3.91%) will be building a new unified view of all its customer data using Salesforce, upgrading its services across its telecom and media businesses to create a better customer experience. CEO Marc Benioff said this is one of the largest deals Salesforce has ever booked, and it will be starting work for AT&T this summer.  

Besides AT&T, Benioff said it's becoming clear that lifestyles are going to be significantly altered post-COVID-19, and the pace of digital transformation is thus accelerating -- quickly becoming a "must-have" to stay relevant. As one of the pioneers enabling digital transformation, this puts Salesforce in an enviable position during this period of crisis.  

Don't sweat the guidance

The accelerating pace of digital transformation may be disappointing to some shareholders, though. Salesforce is still lapping its Tableau takeover from late summer 2019, but even still, guidance for Q2 implied a deceleration in revenue growth to 22% to 23% from a year ago. And full-year fiscal 2021 revenue is expected to be about $20 billion, about 17% projected growth. If that full-year rate transpires, it would be the first time Salesforce's annual trajectory has dipped under 20%.  

I'd hardly call this the end of an era, though. Benioff and company often under-promise and over-deliver. Let's also not forget we are in the midst of a steep drop in economic activity because of the coronavirus. Those companies that have been slow to move on upgrading for the digital age are also some of the businesses getting hit the hardest by the crisis. Even though they're cash-strapped, they are sending more money in Salesforce's direction, making this software giant look like a modern staple.

Plus, though Benioff said now's not the time to be concerned with the bottom line -- and even after spending billions on acquisitions and issuing new shares to get Tableau last year -- free cash flow (basic profits measured as revenue less cash operating and capital expenses) per share has remained relatively stable and is sporting a 50% increase over the last trailing three-year stretch. This tech giant has plenty of liquidity to remain aggressive in investing in future development and taking care of its employees and customers. 

But let's say Salesforce's days of 20% or more revenue growth are in fact over. Investing in a mega-cap cloud computing leader (current market cap of $157 billion) able to grow sales nearly 20% and keep free cash flow stable amid a deep recession? I say, "yes, please." Salesforce remains a core component of my portfolio, and I'll keep adding to my position in the months ahead.

Nicholas Rossolillo and his clients own shares of AT&T and Salesforce.com. The Motley Fool owns shares of and recommends Salesforce.com. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Salesforce, Inc. Stock Quote
Salesforce, Inc.
CRM
$146.01 (1.51%) $2.17
AT&T Inc. Stock Quote
AT&T Inc.
T
$15.94 (3.91%) $0.60

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
326%
 
S&P 500 Returns
102%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.