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Salesforce share – more valuable than SAP! Hype or real amazon?

The Salesforce share has increased by almost 4,000 percent in the last 15 years. Although there was a slight stagnation in 2019, in 2020 the share ignited the turbo again and is now close to its all-time high of February 2020 despite the COVID-19 crash.

The rising share price reflects the success of the company because one of the fastest growing companies worldwide in terms of sales. The exorbitant price gains drove the market capitalization so high that Salesforce now has a higher market capitalization of $ 173 billion than the big competitors SAP and Oracle.

Market capitalization Salesforce, SAP, Oracle

Market capitalization Salesforce, SAP, Oracle (Source: YCharts)

What is the secret of Salesforce’s rapid sales growth? Will the company run away from the competition, or have the limits of growth been reached, and the Salesforce share is just a hype and overvalued. You can find out all of this in this stock analysis.

Salesforce share
logo
countryUnited States
BranchInternet services
IsinUS79466L3024
Market capitalization€ 160.8 billion
Dividend yield
Stability dividend
Stability cash flow0.91 of max. 1.0

The Salesforce business model

Salesforce already offers nerds and fun fact junkies joy with their ticker “CRM”, which is listed on the New York Stock Exchange, because the ticker is also the abbreviation for the core market in which the company operates (CRM = Customer Relationship Management). In terms of content, CRM encompasses several market segments, because of takeovers Salesforce has added more and more components, services and products to its core competency. Instead of listing the individual segments, I give you a better overview of the business and the success of the company by showing you What exactly what the company offers and after that, how it brings its products and services to customers.

Salesforce sales by segment

Salesforce sales by segment

CRM and cloud – an unbeatable combination

As already described, Salesforce is active in the market for CRM, the so-called customer relationship management or customer care. Why is customer care so important for companies? This is strongly related to the acquisition of new customers and the associated marketing and advertising costs, which are usually many times higher than the costs that a company has to pay to keep existing customers. The reason for this is obvious. With existing customers, a company already has essential information, such as their name and address and, of course, their usage behavior. With each further service or product purchased, an even more concrete picture of the customer’s needs is created. As a result, the company is increasingly able to meet the needs of its customers and to tailor its offer. The incentive for companies to keep existing customers is correspondingly great.

However, the added value of customer care does not stop at existing customers. Because companies can use the knowledge and data gained in customer care to gain new customers by, for example, analyzing the buying behavior of existing customers and designing offers for suitable new customers. Likewise, a company can better channel marketing costs if it knows which customers to address and how. The so-called “conversion” of a potential customer interested in a purchase to an actually buying customer is much easier and cheaper. Accordingly, it is important for companies to operate a functioning and efficient CRM. And this is exactly where Salesforce’s secret lies.

Salesforce – the secret of success

To understand Salesforce’s success, you need to step back into the early years of digitalization. Customer care, marketing or even the acquisition of new customers took place at the end of the late millennium mainly in the analogue world. Only individual software solutions remedied this and gradually shifted the CRM business into the digital world.

The problem with the software solutions that were common at the time, such as those offered by SAP, was their complexity. The software had to be installed on a computer, could only be used there and also had to be managed there, e.g. by Updates have been added. Likewise, the individual products were little adapted to the individual needs of customers, because the same program was used by both small and large companies. Salesforce recognized the problem and, with CEO Marc Benioff, opened a huge gap in the market by using the cloud at an early stage and, if necessary, incorporating the necessary expertise through takeovers. Today, Salesforce offers most services and products through a single cloud, the so-called “Customer 360 Platform”.

Most Salesforce applications run on the Customer 360 Platform

Most Salesforce applications run on the Customer 360 Platform (source: https://www.salesforce.com)

The individual services and products are essentially cloud solutions from the PaaS (Platform as a Service) and SaaS (Software as a Service) areas. As in the Amazon analysis explained in more detail, the cloud computing market is multi-layered. In the PaaS area, Salesforce provides programmers and developers with a complete software and programming environment in addition to an infrastructure consisting of hardware. One example is Heroku, a company that Salesforce bought in 2010 for just over $ 212 million and provides developers with a cloud-based platform on which they can develop their own apps in all open source programming languages.

The second major segment that Salesforce operates in is the SaaS area. Here, the company sells self-developed cloud-based software solutions or apps directly to the mainly commercial end users (so-called B2B area = business to business). The nature of cloud solutions also explains why Salesforce is growing so rapidly, especially in the CRM area.

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Companies develop at different speeds, have to be flexible and have very different ideas about their customer management and their own marketing. Cloud solutions are something like the egg-laying wool milk sow. They do not have to be installed everywhere on every computer, but are accessible from everywhere. The provider takes care of the updates, the further development and (very important!) The security, while the customers can concentrate entirely on the growth of their business. In addition, the individual applications for Salesforce customers can be combined and expanded as required. Customers can determine which product they need and to what extent. The offer includes, for example, the modules marketing (e-mail campaigns, SMS marketing, push bench updates, evaluation functions, etc.), customer service (web chat, reviews, etc.) or sales (contact management, task planner, invoicing, etc.). The price model of the sales cloud from Salesforce, with which companies have access to individual or entire customer data and orders, shows you the different range of functions and the associated price differences particularly vividly:

Salesforce products are extremely scalable and therefore offer many advantages, especially for fast-growing companies (Source: www.salesforce.com)

Salesforce products are extremely scalable and therefore offer many advantages, especially for fast-growing companies (source: www.salesforce.com)

That brings the future

Salesforce benefits massively from the fact that its largest competitor SAP initially slept through the switch from software to cloud-based applications. This allowed Salesforce to slowly but surely become the absolute market leader. While the former market leader SAP only has a market share of 8 percent and struggling with falling shares, Salesforce was able to expand its market share for CRM products and services to over 18 percent, and the trend is rising. In addition, there are good signs that growth will continue in the coming years. The CRM market is one of the fastest growing markets in the already extremely growing market for cloud computing.

Worldwide CRM market volume from 2016 to 2016

Worldwide CRM market volume from 2016 to 2016 (Source: Statista)

From a geographical point of view, there is still plenty of growth potential for the company. Above all, I see the European market and Asia as future growth engines for the company. The European market volume is currently $ 9 billion. Salesforce’s $ 1 billion market share in Europe is significantly smaller (approximately 11 percent) compared to global market share of over 18 percent.

Salesforce geographic revenue split (Source: SEC Filing)

Salesforce as a sales rocket

You can see what continuous sales growth of approx. 25 percent per year looks like in the graphic below based on the sales development of Salesforce, because the company has achieved this brilliant achievement. While sales in 2010 were just under $ 1.3 billion, it is expected to generate just under $ 21 billion in fiscal 2021. In this case, sales would have increased more than 16 times within 10 years.

Salesforce's sales performance in the stock finder

Salesforce’s sales performance in the stock finder

Growth is also expected to continue in the distant future. The fundamental development of the CRM market and the paramount importance of customer loyalty for companies make this assumption likely. The increasing market shares in particular indicate that Salesforce will grow even faster than the broad market, whose estimated growth is around 15 percent. For the next few years, sales growth in the range between 20 and 25 percent is plausible.

That’s how profitable Salesforce is

As shown in the Amazon analysis, it can be part of the DNA of a rapidly growing company to generate little or no profit. This also applies to Salesforce, whose reported earnings per share are very irregular and sometimes even become negative.

Salesforce earnings development in the stock finder

Salesforce share earnings development in the stock finder

For companies that are still in their early years or in a strong growth phase and therefore put every cent in future growth, it makes little sense to give profit maximization a high priority. Nevertheless, you should make sure that the business model is fundamentally able to generate profit. A castle in the air that generates sales and cash flow, but still fails to become profitable, is hardly suitable as an investment. At Salesforce, you can see from the gross margin that there is a lot of cash left over from sales, namely almost 70 percent. This strongly suggests that the company is fundamentally profitable, but has high overhead costs, which lead to very low, sometimes even negative, operating margins and net margins.

Salesforce's margins in the stock finder

Salesforce’s margins in the stock finder

However, this phenomenon is not uncommon, but rather widespread in the cloud tech sector and for me no reason to generally refrain from investing in Salesforce shares. Even the internet giant Alibaba accepts falling profits to its cloud business against the big dogs Amazon and Microsoft to push.

Is Salesforce stock overvalued?

The Salesforce share benefits from the company’s excellent position in the CRM market and its excellent prospects. Because it does not look as if the successful course will be left in the medium term. It seems clear that you can’t get Salesforce stocks at a bargain price. However, the question is whether the valuation is still reasonable or whether the stock now seems to be completely overpriced. As with Amazon at Salesforce, you should forget about using profit-based metrics like earnings. Looking at profit isn’t helpful for either company, as Salesforce like Amazon prefers to put every penny in future growth and don’t dream of accumulating equity or paying a dividend to their shareholders.

The result is a partially absurdly high P / E ratio (price-earnings ratio), which in the case of Salesforce can well be in the four-digit range. For such companies, I recommend that you look better at operational cash flow. In the dynamic stock valuation of the stock finder, you can see that the Salesforce share also appears overvalued in terms of cash flow. Based on a fair stock price of $ 152 based on historical cash flow, the current price shows a downside potential of up to approximately 20 percent.

The fair value of the Salesforce share in the stock finder

The fair value of the Salesforce share in the stock finder calculates a short-term downside potential of approx. 20 percent

A KUV (price-to-sales ratio) of over 9.2 indicates an overvaluation in the double-digit percentage range compared to the historical 3-year KUV median of 8.3. The recent rally after the COVID 19 crash is largely to blame for the current overvaluation. In the course of the crash and in previous years, however, there were always smaller time windows in which the share returned to its fair value based on historical cash flow or even fell below it. In addition, due to the corona crisis, cash flow is expected to decrease slightly in the current financial year, which is why I cannot rule out that the share price will return to its historically fair value in the medium term.

Salesforce share: Buy at reset

Even though the Salesforce share symbol on the New York Stock Exchange suggests otherwise, the company did not invent the customer care or customer relationship management market. However, CEO Marc Benioff has turned the market inside out and raised it to a whole new level. This was made possible by early access to the cloud and an offer of easily scalable products and services. In addition, the Salesforce share also fundamentally fulfills all the characteristics of a growth company like Amazon: no dividend, hardly any profit and felt notoriously overvalued.

However, the dynamic stock valuation shows that you can hope for a price reset at Salesforce. Because in this case it would not be the first time that the stock returns to its fair price. If you want to buy the stock today, you can get started in stages and keep some powder dry so that you can buy it again at a discount if the price drops.

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