Please ensure Javascript is enabled for purposes of website accessibility

Is Salesforce Stock a Buy?

By Trevor Jennewine - Mar 20, 2021 at 7:45AM

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

This tech company has been a great investment, but it still has room to grow.

Salesforce (CRM -0.24%) is one the largest software-as-a-service (SaaS) companies in the world. Its business is focused on helping clients develop and maintain good relationships with their customers.

Historically, Salesforce has been a great investment. Shares are up 188% over the last five years, more than doubling the 91% return of the broader S&P 500. But winners often keep on winning, and Salesforce still looks like a good stock to buy. Here's why.

Big market opportunity

Consumers interact with businesses in a variety of ways: marketing content, online stores, sales personnel, customer service agents, and many more. All of those interactions create valuable data, but the data is typically stored in different places. Put another way, even though sales and marketing teams may interact with the same customers, the data is stored with separate departments.

Antique scale tipping to one side.

Image source: Getty Images

Salesforce's customer relationship management (CRM) platform solves that problem. Its allows clients to unify data from sales, services, marketing, and commerce, helping all enterprise teams collaborate and work more productively. Ultimately, that translates into better customer engagement, which often leads to greater profitability.

Providing a high-quality customer experience has always been important, but the pandemic-driven digital acceleration has made it even more necessary. In fact, according to research by Salesforce, 80% of consumers believe the experience a company provides is more important than the products.

Put simply, the critical need for strong customer relationships has created a big opportunity for Salesforce. Management estimates the company's addressable market will reach $175 billion by 2025. And as the leader in the CRM industry, with nearly 20% market share, Salesforce has an advantage over rivals like Oracle and SAP

Strong financial performance

Salesforce's leadership position in the CRM market has helped it grow revenue quickly. In fact, in the most recent earnings call, CEO Mark Benioff said Salesforce will reach $50 billion in annual revenue faster than  any other enterprise software company.

Metric

2018

2021

CAGR

Revenue

$10.5 billion

$21.3 billion

26%

Free Cash Flow

$2.2 billion

$4.1 billion

23%

Data source: Salesforce SEC filings. Note: Fiscal 2021 ended Jan. 31, 2021. CAGR = compound annual growth rate.

Salesforce benefits from a cost-efficient SaaS business model. This has kept its gross margin in the mid-to-low-70% range, meaning Salesforce could be an incredibly profitable enterprise as it continues to scale its business.

Also noteworthy is the company's healthy balance sheet. It has $2.7 billion in long-term debt, but that figure pales in comparison to its $12.0 billion in cash and marketable securities. That strong financial position makes Salesforce's business agile and resilient.

Innovative culture

In 1999, Salesforce helped pioneer the SaaS industry when it launched its first cloud-based CRM software. In the 20 years since then, the company's innovative culture has helped it dramatically expand its portfolio of products. And today Salesforce is just as innovative as ever.

For example, Salesforce Einstein is an artificial intelligence engine that automates certain tasks and make predictive recommendations. That helps clients work more productively, which boosts profits more often than not. Notably, research firm Gartner recently recognized Salesforce as the leading provider of sales force automation solutions. That's important, because the International Data Corporation (IDC) estimates that global spending on AI will reach $110 billion by 2024 (more than double the $50 billion spent in 2020).

Likewise, the Salesforce low-code platform empowers virtually anyone to build applications, even if they don't know computer code. But the truly innovative part of the platform is its support for blockchain applications. Blockchain technology -- best known for its record-keeping role in cryptocurrency -- is a highly secure and decentralized way of verifying and storing data, and it has the potential to transform many industries.

Those are just two examples, but the point is this: Salesforce's innovative culture is a valuable asset, and it should keep the company on the cutting edge of the CRM market.

A final word

Salesforce recently announced its intention to acquire communications specialist Slack. This fits the company's modus operandi as a serial acquirer. Investors should pay attention to this situation: Integrating two businesses can be challenging, and if things go poorly, Salesforce's performance could suffer.

That being said, the company has successfully pulled off several large mergers in the past. More to the point, Salesforce's massive market opportunity, strong financial execution, and innovative culture should make it a good long-term investment in almost any scenario.

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.com, inc. Stock Quote
salesforce.com, inc.
CRM
$163.73 (-0.24%) $0.39
Oracle Corporation Stock Quote
Oracle Corporation
ORCL
$71.88 (3.11%) $2.17
SAP Stock Quote
SAP
SAP
$99.06 (1.56%) $1.52

*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 service.

Stock Advisor Returns
338%
 
S&P 500 Returns
119%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/17/2022.

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.