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With Strong CRM Opportunities, Salesforce Could Be a Good Investment

July 21, 2014 | About:
jaggom

jaggom

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Salesforce.com's (CRM) earnings are estimated to increase by almost 30% for the next five years. Still, investors are not positive about its prospects. Salesforce illustrated revenue growth of 37% to $1.23 billion in the first quarter and issued a robust outlook for the current quarter. Further, Salesforce increased its full year guidance with year over year revenue growth expected to be in the range of 30%-31% for the fiscal year. Still, Salesforce shares declined after the company reported a wider loss.

Salesforce's loss expanded from $67.7 million in the year-ago period to $96.9 million in the first quarter. But, the company did beat the bottom line estimate on adjusted earnings and reported $0.11 per share as against the expectation of $0.10 a share.

Solid performance

Critics of the company are focusing on the expanding net loss figure. Instead, Salesforce operates in a rapidly-growing cloud environment and the company is investing aggressively to grow its business.

For example, Salesforce.com recorded greater than 200 transactions in the fourth quarter of last year that were seven figures or greater. In addition, they included more than 10 eight-figure transactions as well. Going forward, this performance is expected to be sustained on account of a robust cloud-based platform. The SalesForce1 cloud and service cloud applications of the company are gaining popularity due to enhanced services and support, and is believed to be a solid growth driver going forward.

Better times in store

Salesforce1 is built API first, which can connect with anything and everything on various devices such as smartphones and tablets. The success of Salesforce1 can be seen from the fact that the company announced over 250 major independent software vendors, or ISVs, who have signed to build Salesforce1 applications on the company’s AppExchange. Further, Salesforce.com has more than 30 Salesforce1 apps like Evernote, Dropbox, LinkedIn, and HP Live already running on the AppExchange.

Service cloud, another interesting segment of Salesforce.com, also looks to have promising growth with the launch of Desk.com. The service cloud is focused on small service concepts for small businesses. Moreover, according to management, the ExactTarget Marketing Cloud of Salesforce.com is believed to be the world’s most powerful customer platform for one-to-one marketing,.

The ExactTarget Marketing Cloud is expected to capitalize on the industry's growth and is expected to be a big advantage for Salesforce going forward. According to Forrester, digital marketing spend is expected to double in the next five years, which comprises 30% of the total marketing spend by 2017.

The Sales Cloud product of Salesforce is also on a roll. This is another leading platform for sales, according to IDC. The company is focused on making the Sales Cloud platform even better by deploying next generation apps, that’s why good traction is expected in its sales, service, and marketing with Force.com in place. In addition, Heroku and Fuel are also making good strides to strengthen their ecosystem in order to tremendously improve in the number of app developers on the Salesforce platform that are reported to have increased 50% to 1.5 million on year over year basis.

Conclusion

There’s no trailing P/E ratio of Salesforce as the company is running in a loss currently. Its forward P/E of almost 72 is also very high. This rich valuation is another reason due to which shorts have been piling into Salesforce. Still, analysts expect the earnings for Salesforce.com to grow at an estimated CAGR of 29.50% for the next five years, which is almost double of the industry’s CAGR of 15.92%.

The fast revenue growth of the company is creating good momentum in the business, and looking at the impressive expected earnings growth rate, the stock looks like a solid investment. Hence, investors must forget the shorts and focus on its promising long-term growth prospects.


Rating: 1.0/5 (1 vote)

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Comments

SapientInvestor
SapientInvestor - 4 months ago

FYI, management has clearly stated that they do not expect to make a profit into the forseable future, therefore, they do not have a forward PE either. The number you blindly took off of some site uses adusted earnings estimate which excludes stock option compensation among other things. Also, there are only about 42M shares short out of 614M outstanding. You should probably do a bit more research on your assumptions before drawing such definitive conclusions. The key to understading how this stock currently moves is not the investors that are short the stock but the institutions that own the stock.

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