Salesforce (CRM +0.51%) has minted plenty of millionaires since its public debut in 2004. If you had invested $10,000 in the cloud software maker's IPO at $2.75 per split-adjusted share, your investment would be worth just over $1 million today.
That 100-bagger gain was driven by its first mover's advantage in the cloud-based customer relationship management (CRM) market and its expansion into the commerce, marketing, analytics, and data visualization markets.
From fiscal 2004 to fiscal 2024 (which ended this January), Salesforce's revenue rose at a compound annual growth rate (CAGR) of 34%, while its net income grew at a CAGR of 61%. That was an impressive run, but can Salesforce keep growing and turn a fresh $10,000 investment into more than $1 million again over the next two decades?
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Salesforce faces long-term challenges
Salesforce controlled 22.1% of the global cloud-based CRM market in 2023, according to Gartner. That's higher than the combined market share of its four closest competitors: Microsoft, Oracle, SAP, and Adobe. It also leveraged the strength of its CRM business to lock its customers into its other cloud-based enterprise services.
However, four of Salesforce's five cloud platforms (sales, service, platform and other, marketing and commerce, and integration and analytics) suffered significant slowdowns throughout fiscal 2024 (which ended this January).
|
Revenue Growth by Segment |
FY 2023 |
FY 2024 |
|---|---|---|
|
Sales |
19% |
11% |
|
Service |
18% |
12% |
|
Platform and Other |
36% |
11% |
|
Marketing and Commerce |
21% |
9% |
|
Integration and Analytics |
16% |
20% |
|
Total |
22% |
11% |
Data source: Salesforce. Constant currency terms.
That deceleration was caused by three major challenges. First, the macro headwinds forced many of Salesforce's customers to rein in their software spending. Second, it faced tough competition from faster-growing CRM challengers like Microsoft's Dynamics 365, which generated 24% year-over-year constant currency growth in its latest quarter. Lastly, activist investors pressured Salesforce to trim its spending and pause its strategy of expanding inorganically through big acquisitions.
Salesforce expects its slowdown to continue with just 8% to 9% revenue growth in fiscal 2025, and analysts only expect its revenue to rise at a CAGR of 10% from fiscal 2024 to fiscal 2027. That might be a bit slower than the expansion of the global CRM market, which Grand View Research expects to grow at a CAGR of 13.9% from 2024 to 2030. It's also arguably a tepid growth rate for a stock that still trades at 7 times this year's sales.
NYSE: CRM
Key Data Points
As Salesforce's revenue growth cooled off, it laid off thousands of employees and cut costs to expand its adjusted operating margin from 22.5% in fiscal 2023 to 30.5% in fiscal 2024. It also plowed its rising free cash flow into its first buyback plan last year and its first dividend earlier this year. Those shareholder-friendly moves appeased its activist investors, but they also strongly imply that Salesforce's high-growth days are over.
From fiscal 2024 to fiscal 2027, analysts expect its earnings per share (EPS) to grow at a CAGR of 28% on a generally accepted accounting principles (GAAP) basis. That's a robust growth rate, but a lot of that future earnings growth has already been baked into its forward price-to-earnings ratio of 45. In comparison, Microsoft trades at 31 times next year's earnings.
It probably won't generate another 100-bagger gain
With a market cap of $268 billion, Salesforce would need to grow into a $26.8 trillion company over the next 20 years to turn a $10,000 investment into $1 million again. That would be extremely difficult considering the limitations of its core market.
If Salesforce grows its GAAP EPS at a steady CAGR of 15% from fiscal 2024 to fiscal 2044, it would generate $70 per share in earnings by the final year. Assuming it trades at a more reasonable 25 times earnings by then, its stock would be trading at $1,750 per share -- which would represent a six-fold gain from its current levels.
If it grows its GAAP EPS at a higher CAGR of 20% from fiscal 2024 to fiscal 2044, it could generate $160 per share in earnings by the last year. With a more generous multiple of 30, it would trade at $4,800 -- a 17-bagger gain from today's price.
In either scenario, Salesforce could still be a solid play on the secular growth of the cloud software market. However, investors should temper their expectations and realize it won't replicate its millionaire-making gains from the past two decades.
