Salesforce Stock Is a Serious Long-Term Value Right Now

Cloud computing pioneer Salesforce.com (CRM -0.57%) put the final touches on a great 2022 fiscal year (the 12 months ended in January 2022) to little fanfare. The stock price has barely budged and remains close to its 52-week low, down over 30% from its all-time high.  

Salesforce has been caught up in the high-growth tech sell-off spurred on by the Federal Reserve's promise to begin hiking interest rates this year. Nevertheless, the digital transformation leader keeps upgrading expectations for the year ahead and remains on course to hitting co-founder and CEO Marc Benioff's goal of reaching $50 billion in annual revenue in just a few more years. Shares look like a great value right now.

Image source: Getty Images.

A great conclusion to the year, with or without Slack

The big news for Salesforce this past year was of course its largest-ever acquisition of work collaboration software company Slack last summer. It paid a hefty price tag in its bet on remote and hybrid work, but Salesforce's growth performance stands on its own feet. Fiscal 2022 revenue grew 25% year over year to $26.5 billion, or up 22% when excluding $584 million in revenue from Slack during the two quarters it was part of the Salesforce family.

*Excludes $584 million in Slack revenue in fiscal 2022. Data source: Salesforce. YOY = Year over year.  

Salesforce did increase its total share count by about 5% (when comparing Q4 2022 total shares outstanding with a year ago) as a result of its acquisition. However, it's still early on in the game for Salesforce's integration of Slack into its operations. In the meantime, it was promising to see free cash flow notch a 29% increase in the last year to $5.3 billion. Shares now trade for 38 times trailing-12-month free cash flow as of this writing.

On pace to reach ambitious goals

Of course, a stock trading for nearly 40 times trailing-12-month free cash flow isn't exactly cheap. But given the company's trajectory for both revenue and profitability growth, shares look like a great long-term value to me right now.

For one thing, Benioff and company habitually over-deliver on their promises. That's no guarantee the trend will continue, but Salesforce did upgrade its fiscal 2023 expectations once again during the earnings report. Revenue guidance was raised by $300 million and is now expected to be as much as $32.1 billion, about a 21% year-over-year increase (including $1.5 billion in sales from Slack). Free cash flow is also expected to increase 25% to 26% year over year, according to CFO Amy Weaver.

This pace of expansion keeps Salesforce on track to hit its longtime goal of reaching $50 billion a year in revenue by fiscal year 2026 (the period that will end in January 2026, but corresponds mostly to calendar year 2025). All Salesforce needs to do is average a high-teens percentage growth rate through that time, excluding further acquisitions. And if free cash flow can grow at the same pace (at roughly a 20% margin to revenue), that means Salesforce stock currently trades for about five times fiscal 2025 free cash flow.

I'm making a lot of assumptions here that might not hold true. For example, Salesforce is a serial acquirer of other software companies. Its share count could continue to rise and dilute current shareholders, not to mention cause a temporary setback in profitability. But the long-term trend remains intact. Salesforce has generated lots of shareholder value over the last decade and a half.

Data by YCharts.

Another great year lies ahead for Salesforce as it helps its global customer base make digital transformation and adapt its customers' employees for hybrid and remote work. Shares look like a great value right now if you plan to hold for at least a few years.