Salesforce (CRM 0.42%) was founded in 1999, and the software company made its public market debut in 2004. The stock has since skyrocketed by 6,730%, and the Salesforce brand has become synonymous with customer relationship management (CRM) software. In fact, it has evolved into the second-largest enterprise software company in the world.
Innovation has been instrumental to that success. Salesforce was among the first companies to deliver its software from the cloud, and regular product development has kept it on the cutting edge of CRM technology. More recently, it has turned its innovation engine on data analytics and artificial intelligence (AI). Those efforts could send the stock higher in the future.
Here's what investors should know.
Salesforce reported profitable growth in its fiscal third quarter
Salesforce reported solid results for the third quarter of its fiscal 2024 as it continued to balance growth and profitability. For the period, which ended Oct. 31, revenue increased 11% to $8.7 billion on particularly strong momentum in the data cloud segment. Meanwhile, non-GAAP (adjusted) net income soared by 51% to $2.11 per diluted share as disciplined expense management drove an 850-basis-point expansion in its operating margin.
The chart below shows its fiscal third-quarter revenue growth across all five of its subscription software segments, which constitute the vast majority of its total revenue. Salesforce also derives a small portion of revenue from professional services, including advisory and training services.
Chart by author.
Salesforce is well positioned to grow its business. Its 22% market share in customer relationship management software exceeds that of the next four competitors combined, and analysts have praised its products in multiple industry verticals. In the past year, Gartner has recognized its leadership in sales force automation, multichannel marketing, digital commerce, customer engagement, and customer data software.
Moreover, research company G2 ranked Salesforce as the best software seller in any product category in 2024. That commendation was based on high customer satisfaction scores and a strong presence across several software markets.
Collectively, those accolades tell investors that Salesforce is doing something right. But they also tell prospective customers that it has software products worth considering.
Product innovation should drive strong revenue growth
Salesforce has a significant opportunity to drive growth through data analytics and artificial intelligence (AI) products. A survey from Morgan Stanley identified those categories as the two highest IT spending priorities in 2024. That survey also identified Salesforce as being the third most likely company to gain share in IT budgets, behind Microsoft and Amazon, this year.
Indeed, Salesforce reported strong demand for data analytics and integration tools in its fiscal third quarter, and momentum should accelerate as more businesses lean into AI. In fact, CEO Marc Benioff expects data cloud to become the core engine behind every Salesforce application. Businesses must have a data management strategy before they can build and deploy effective AI, and the Salesforce data cloud is a logical option simply because so many businesses already use its CRM software.
Additionally, Salesforce recently announced the general availability of Einstein Copilot, a generative AI assistant that automates workflows across its CRM applications. For instance, it can surface predictive sales insights, respond to customer service requests, create personalized marketing material, and aid in the development of digital storefronts. Einstein Copilot could produce a significant revenue stream as more businesses turn to AI to boost productivity and improve efficiency.
Finally, Salesforce also provides CRM products designed for specific industries such as consumer goods, healthcare, manufacturing, and retail. That strategy has been effective because it reduces friction for potential customers. For instance, nine of its 13 industry-specific CRM platforms grew revenue by more than 50% in its fiscal third quarter. Those beneficial effects should persist.
Salesforce stock trades at a reasonable price
Wall Street expects Salesforce to grow its revenues at a 12% annualized rate over the next five years, but that estimate leaves room for upside surprises. The CRM market is forecast to expand at an annualized rate of 14% through 2030, which potentially puts Salesforce on a glide path to low-teens percentage revenue growth simply because it dominates the CRM industry.
However, it has an opportunity to gain share in IT budgets with newer products for data management and generative AI. That hints at a bull-case scenario defined by mid-teens percentage revenue growth through the end of the decade. In any case, its current valuation of 8.5 times sales looks reasonable in context, despite being a premium to the company's three-year average of 7.5 times sales.
The market seems to be sleeping on Salesforce, or else investors lack confidence in its ability to keep pace with the CRM market. In either case, that creates a buying opportunity. Salesforce will not triple over the next five years -- it's not a moonshot stock -- but it could certainly beat the market during that period. Patient investors should consider buying a small position today, especially as part of a broader basket of AI stocks.
