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3 Reasons Salesforce Is a Buy After 21% Stock Price Drop

By Bradley Guichard – Jan 5, 2022 at 7:25AM

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Salesforce is paving the way for companies to transform operations digitally, and the stock drop offers a buying opportunity for long-term investors.

If the pandemic has taught us anything, it is that companies have a lot of thinking to do about the future of office technology. The result of that thinking, according to one estimate, is that companies will spend $10 trillion through 2024 transforming their businesses to suit the needs of this new digital world. One company that is well suited to helping these businesses make that transformation. It's stock also happens to be on sale right now. (CRM 0.02%), the industry leader in cloud-based customer relation solutions, provides enterprise cloud computing solutions focused on customer relationship management (CRM). An investment of $10,000 five years ago would be worth nearly $37,000 today. But it's not too late to invest in this perennial outperformer.

Chart showing rise in Salesforce's price growth since 2017.

CRM data by YCharts

Salesforce stock was flying high until its latest earnings and guidance were released on Nov. 30. Investors were disappointed, and the stock price fell. It now trades over 21% off its recent 52-week highs, providing an opportunity for long-term investors to accumulate shares. The company is still a terrific bet for the future based on its successful mergers and acquisitions (M&A) activity, industry-leading technology, and focus on growth. 

Salesforce has been integrating Slack

Salesforce closed the Slack acquisition in July 2021, setting up the company as a juggernaut of workforce communications solutions. One lesson from the pandemic is that companies will need team communication tools such as direct messages, groups, and chats to compete in the "work-from-anywhere" era. Slack provides all of these services and more.

Salesforce has a history of successfully integrating and growing acquisitions. In 2019, at the close of the purchase, Tableau was producing $1.3 billion in annual revenue. Today, Salesforce has grown this business to $1.7 billion in annualized revenue. Going back nearly a decade, other acquisitions have seen similarly impressive results, as shown below. This bodes well for the future of Slack and Salesforce as a whole. 

Chart of Salesforce acquisitions and annual revenues at close and now

Data source: Salesforce. Chart by author.

Salesforce is a tech leader

One of the best indications of future success is the product quality that a company puts out. Gartner, a research company that analyzes data and ranks technology companies as challengers, niche players, visionaries, and leaders in various categories, ranks Salesforce as a leader in at least seven of these categories. These top rankings suggest Salesforce will continue to execute and make gains for shareholders in the future despite the short-term pullback.

People on computers in office, conected by cloud diagram.

Image source: Getty Images.

Salesforce is seeing revenue growth

Salesforce posted a record $6.86 billion in top-line revenue in third-quarter fiscal 2022, up from $5.42 billion for the same period in the prior year and an increase of 27%. For the full fiscal year 2022, Salesforce expects revenue of $26.4 billion, a 24% jump from fiscal 2021. Revenue is expected to reach $31.7 billion to $31.8 billion in fiscal 2023.

These results put the company well on its way to its goal of $50 billion in revenue by fiscal 2026. Salesforce would need to grow just over 17% compounded annually to reach this goal, which appears to be readily achievable. As with the successful integration and progress of acquisitions, much of Salesforce's growth success is due to its cohesive ecosystem of products. Instead of viewing each as an individual silo, management has a coherent vision of one company and a reachable long-term target. 

If there is a concern for investors looking to buy stock right now, it's Salesforce's relatively high market cap. The stock currently trades at a price-to-sales (P/S) ratio of 9.8 (9.5 on a forward basis). The P/S ratio is slightly above pre-pandemic averages and is certainly not cheap even after the drop.

Charts showing rise in Salesforce's PS ratio and market cap since 2018.

CRM PS Ratio data by YCharts

The P/S ratio would drop under eight based on the upcoming fiscal 2023 guidance. The stock has consistently traded over eight times sales since January 2018, and this is likely to continue. If Salesforce meets or exceeds its target of $50 billion in revenue by fiscal 2026, the stock could nearly double and still trade within the range of historical averages. 

Long-term goals intact

Salesforce is unquestionably a market leader in cloud-based digital CRM and other digital transformation solutions -- and it has the accolades to prove it. The company has a history of growing acquisitions by integrating them into its cohesive ecosystem of offerings. This bodes well for the Slack acquisition, which closed in fiscal 2022. The goal of $50 billion in sales by fiscal 2026 is well within reach as revenues continue to grow impressively.

The valuation is slightly elevated based on current guidance. However, the P/S ratio will fall under recent historical averages on a forward basis once the fiscal year flips in January 2022. Stocks like Salesforce don't often go on sale, and the recent 21% drop in price offers long-term investors a compelling entry point in this dynamic company. 

Bradley Guichard has no position in any of the stocks mentioned. The Motley Fool owns and recommends The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.

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