The Dow Jones Industrial Average is home to some of the world's largest companies, including Apple, JPMorgan Chase, and McDonald's. But in 2023, an unsuspecting software company topped the index as its best performer. Salesforce (CRM 0.42%) stock rose 98% in 2023 -- higher than any of its Dow Jones cohorts.
The company's visionary CEO, Marc Benioff, could be viewed as a specialist in mergers and acquisitions. Although Salesforce has long been a staple for sales and marketing professionals, the company is quickly making inroads into other areas of enterprise software. From data analytics to workplace productivity tools, Salesforce is evolving into a more sophisticated business -- and artificial intelligence (AI) is front and center in this growth story.
Let's dig into what fueled Salesforce's growth last year and assess why further returns could be in store for 2024 and beyond.
Master of acquisitions?
Salesforce is no stranger to acquisitions. In more recent history, the company has completed deals with MuleSoft, Tableau, and Slack. While investors initially viewed the decision to complement Salesforce's customer relationship management (CRM) software with a host of other tangential solutions as a savvy move, the company may have been a little overzealous in its growth ambitions.
CRM Revenue (Quarterly) data by YCharts
The chart above illustrates that Salesforce has had few problems growing its revenue. By bolstering its CRM with other software tools, the company has undoubtedly been able to better cross-sell to customers while simultaneously broadening its total addressable market.
However, acquisitions often come with complex integration efforts that can take a toll on a company's growth trajectory. As seen above, while revenue has grown at an impressive rate, Salesforce's free cash flow and gross margin profiles have fluctuated quite a bit.
Image source: Getty Images.
Artificial intelligence (AI) is helping right the ship
Image source: Company Investor Relations.
The slide above depicts revenue growth trends among Salesforce's leading product categories. More importantly, the company shares how its largest acquisitions are impacting the business. In fiscal 2024's third quarter, ended Oct. 31, MuleSoft's revenue grew 26% year over year -- compared to just 10% in Q1 of fiscal 2023. On the flip side, growth from Tableau and Slack have been inconsistent for several quarters now.
However, during the latest earnings call, management shed some light on how all of these tools are now leveraging artificial intelligence (AI), which could very well inject some now life into the overall business. Benioff proclaimed, "This AI revolution is a productivity revolution, and it means that every customer is just a lot more augmented."
What Benioff is ultimately getting at is that AI is going to play an integral role in workplace automation and productivity. Moreover, data is more important than ever for leadership to make informed, efficient decisions. As such, businesses are going to need a full spectrum of analytics tools, communication instances, and storage applications to connect and share data among different enterprise software suites.
The power of AI and its myriad use cases is allowing Salesforce to take its acquired properties to the next level, and help its customers reach a level of flexibility that it does not yet have.
Should you invest in Salesforce stock?
The potential for AI to improve Salesforce's business looks promising. The company is relentlessly innovating and releasing new features across its portfolio, and is using AI as its primary marketing driver. With that said, the run-up in the stock should not go unnoticed. While Salesforce appears to be maturing as a business, the company's margin expansion and cash flow generation still have a long way to go.
CRM PS Ratio data by YCharts
At a price-to-sales (P/S) multiple of 8.4, Salesforce is trading at a slight premium to its 10-year average based on this metric. Nevertheless, despite its market-beating return in 2023, I do not see the hype of AI as fully baked into the stock.
Salesforce is in a solid position to benefit from increased spending in generative AI, and its diversified software suite certainly helps differentiate the company from other workplace productivity solutions. AI appears to be the force driving reaccelerated growth across its products, making Salesforce an under-the-radar AI opportunity outside of the "Magnificent Seven" stocks.
Although the stock may not be an absolute bargain, now could be an interesting time to scoop up some shares during this maturation phase for the company.
