Fears of inflation and rising interest rates have sparked a steep sell-off in recent months that has driven down the share prices of countless companies. The current bear market has been especially unkind to growth stocks. Even powerful industry leaders like Salesforce (CRM -1.53%) have not been spared from the carnage.
Yet therein lies your opportunity.
The cloud computing titan's fiscal 2023 first-quarter earnings report, which it released on Tuesday, showed that despite considerable macroeconomic challenges, it's continuing to grow its sales and free cash flow at impressive rates. With its stock price still down by about 25% even after Wednesday's sizable gains, now is a great time to consider buying Salesforce's shares.
Here's why.
1. The software-as-a-service giant has long runways for growth
Salesforce grew its revenue by a solid 24% year over year to $7.4 billion in its fiscal first quarter, which ended on April 30. The company expects to earn a total of roughly $31.8 billion in its fiscal 2023, which would amount to growth of approximately 20%. These are outstanding growth rates for a $175 billion business.
Yet Salesforce's current revenue base pales in comparison to its long-term market opportunity. Management pegs its total addressable market at a whopping $284 billion by 2026. That leaves plenty of room for Salesforce to grow even larger.
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2. Salesforce is becoming more profitable as it expands
Unlike many lesser-quality growth stocks, Salesforce has moved beyond the stage of simply trying to maximize revenue. It has made great strides in improving its profitability in recent years. Its adjusted operating margin was 17.6% in the first quarter, up from 13.1% in the prior-year period. Management sees that figure rising to 20.4% for its full fiscal 2023.
Salesforce's improving profitability is also leading to robust cash flow production. Operating cash flow rose 14% to $3.7 billion in the quarter, and free cash flow likewise rose 14% to $3.5 billion. Management can use that cash flow to build and acquire new technologies that could further bolster Salesforce's long-term growth. It could also use some for stock buybacks, and perhaps even (at some point) dividends.
3. Salesforce and its shareholders have many ways to win
There are several reasons why Salesforce's leadership is so optimistic about the company's future. Perhaps the biggest is that it stands to benefit from powerful technological trends.
Salesforce is helping to enable the digital transformation megatrend. Businesses around the world are using its tools to digitize their processes and transition their operations to the cloud. By giving its clients the ability to aggregate, analyze, and act upon the huge amounts of data they collect, Salesforce has positioned itself as an increasingly vital tech partner to thousands of companies.
Salesforce is also helping to power the trend toward distributed workforces. Its $28 billion acquisition of popular messaging platform Slack in 2021 cemented its place as a key provider of business communications solutions -- at a time when the ability to bring together office-based and remote employees is becoming only more important.
Better still, Salesforce is well-positioned to profit from the adoption of advanced technologies like artificial intelligence (AI). The software leader has invested aggressively to strengthen its AI and machine-learning capabilities. In turn, it's now able to provide its customers with tools that can help them make smarter and more profitable decisions than they would otherwise be able to.
By combining big data, cloud communications, and AI tools with its core customer relationship, sales, marketing, and support solutions, Salesforce is helping companies harvest an ever-growing array of benefits from the cloud. And with its sales, profits, and cash flow all likely to grow steadily in the years ahead, Salesforce also appears set to deliver strong returns to its shareholders along the way.
