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Salesforce Inc(CRM-N)

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Salesforce Is Quickly Becoming a Highly Profitable Company -- Is the Stock a Buy?

Motley Fool - Thu Jun 8, 5:11AM CDT

Salesforce (NYSE: CRM) is proving the "buy-the-dip" strategy still works. After a horrendous showing in 2022 (shares fell 48%), Salesforce stock has rallied nearly 60% so far in 2023. And that includes a post-earnings dip due to some mild investor disappointment with a lack of a more meaningful upgrade in financial outlook.

After years of rapid growth, spurred on by a seemingly endless list of acquisitions, Salesforce was in hot water during the bear market. With interest rates on the rise and economic growth slowing, shareholders demanded more profitability. Co-founder and CEO Marc Benioff is delivering on that front. But after its recent resurgence, is this stock still a buy?

Customers are (a bit) more cautious

Salesforce kicked off its first quarter fiscal 2024 (ended April 30, 2023) in strong fashion. Revenue was up 11% year over year to $8.25 billion, about $70 million above guidance provided three months ago.

However, the market was ho-hum that Benioff and company didn't update the full-year revenue outlook. With "recession" still on the tip of every corporate boardroom's tongue, Salesforce is playing it safe along with its customers. It seems many businesses are slowing the pace of software adoption as they tighten up on spending. Nevertheless, the current outlook still implies about 10% growth over and above last year.

But one key metric did get an upgrade: earnings expectations. After taking heat last year and responding with extensive personnel housekeeping, Salesforce is now handily profitable by all metrics -- and rapidly improving.


Previous Fiscal 2024 Outlook

New Fiscal 2024 Outlook

Fiscal 2023 Results

Implied YoY Growth

Earnings per share

$2.59 to $2.61

$2.67 to $2.69



Adjusted earnings per share

$7.12 to $7.14

$7.41 to $7.43



Data source: Salesforce. YoY = year over year.

During the last earnings call, Benioff talked at length about the transformative force that generative AI will be. More importantly to shareholders, though, he added making Salesforce "the most profitable enterprise software company in the world" to the list of lofty aspirations. Previously, the goal was to simply make Salesforce "the largest enterprise software company in the world." What exactly does this new objective mean?

Salesforce wants to make it rain cash

I'm going to exclude Microsoft (NASDAQ: MSFT) from this discussion of "largest enterprise software companies" because it has substantial business outside of software, as well as large consumer-facing businesses. But the remaining list includes IBM (NYSE: IBM), Oracle(NYSE: ORCL), and SAP (NYSE: SAP) -- all of which generate ample cash. Oracle in particular is enjoying a resurgence of growth right now too. However, salesforce is homing in on the top spot, especially when using free cash flow (which more closely mirrors adjusted earnings).

CRM Free Cash Flow Chart

Data by YCharts.

Either way, Benioff and his top team have more work to do to catch top dogs IBM and Oracle. However, with revenue growth coming in at just over 10% in a bad year and profit margins rising rapidly, Salesforce may achieve this new milestone before too long.

Is the stock a buy?

After the last update, Salesforce stock trades for 79 times expected current-year earnings or 28 times expected earnings on an adjusted basis. This is once again a premium price-tag investment that assumes this software giant can continue outpacing its peers in revenue growth and make further progress in profit margins.

However, Benioff appears to be making good on promises to transform the business. Last quarter, management even executed another $2.1 billion in shareholder returns via stock buybacks. A new page has been turned, and Salesforce is aging well. I'm happy with my current position. After the big run-up in share price this year, new shareholders might want to employ a dollar-cost average plan to build a larger position over time if you believe the Salesforce story will be an enduring one.

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Nicholas Rossolillo and his clients have positions in Salesforce. The Motley Fool has positions in and recommends Microsoft and Salesforce. The Motley Fool has a disclosure policy.

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