For much of the last decade, Salesforce (CRM 3.09%) co-founder and CEO Marc Benioff has been talking about becoming "one of the largest enterprise software companies in the world." Mission success. Salesforce is No. 3, behind much-older industry titans Microsoft and Oracle.
Salesforce's rapid growth, spurred on by a seemingly endless string of acquisitions, served its purpose for the time. The cloud software movement that Salesforce pioneered was white-hot in the 2010s. A never-ending line of start-ups fueled by venture capital money struck out to lay claim to the growing industry, and Salesforce purchased its fair share of them to bolster its status as a platform and to stave off future competition.
But times change. The software boom is over for now, and investors are demanding better profit margins rather than all-out growth. Salesforce has successfully made the pivot. After rallying 90% through the first 11 months of 2023, is the stock still a buy for 2024?
NYSE: CRM
Key Data Points
Salesforce is executing on its plan of growth and profitability
For fiscal 2024 (the 12-month period ending in January 2024), Salesforce is on track to reach about $34.8 billion in revenue. That's just an 11% year-over-year increase, far lower than the 20%-plus pace longtime shareholders have been accustomed to.
Growth is growth, though, and it's not surprising to see Salesforce's exponential rise taper off now that it's of such immense size. After all, 2023 has marked a general cooldown for the cloud software market overall, so a titan like Salesforce certainly isn't going to be immune. Time will tell if Benioff and company can reaccelerate their top-line trajectory next year (fiscal 2025, which corresponds to calendar year 2024).
Data by YCharts.
But of far more importance at this point is better operational excellence. Software is a high-profit business, but especially in the last couple of years, the long run of free cash flow generation took a breather. Net income, based on generally accepted accounting principles (GAAP), also faltered. That was largely due to all those acquisitions, culminating in the big purchase of Slack in 2021 -- on record as one of the largest software deals ever.
But Salesforce has successfully reignited free cash flow growth, and GAAP profitability is making a big comeback too. In Q3, operating margin came in at 17%, well ahead of management's guidance and a massive improvement from just under 6% the same period last year.
Data by YCharts.
A new page has been turned
There is still work to do at Salesforce in this new era of operational efficiency. One of the primary discrepancies between GAAP profits and free cash flow, for example, is employee stock-based compensation (SBC). SBC was $2.11 billion through the first nine months of this year, down a bit from the $2.47 billion the same period last year.
However, at just over 8% of total revenue, SBC is still elevated for a company of this size. If Salesforce wants to really ratchet up its profit margins, this metric will need to come down further.
Nevertheless, Benioff and the top team say they are committed to offsetting this shareholder dilution from SBC. Stock repurchases to date were $5.9 billion, more than offsetting SBC, and there's still another $10 billion left under the current buyback authorization.
It's nevertheless a good start for the more "shareholder-friendly" Salesforce as it flips from a young growth business to a mature tech giant. If the current trend continues, 2024 could be another big year of more moderate revenue growth but dramatic profit expansion.
The stock currently trades for 28 times trailing-12-month free cash flow. That looks like a reasonable price to me, especially assuming profit growth can average a low-to mid-teens percentage growth rate in the coming years. Even if the cloud software market continues at a similar pace as it has these past two years during economic turmoil, Salesforce looks like a top long-term buy.
