Salesforce.com Inc. (CRM, Financial), one of the world’s top CRM software companies, continues to grow its revenue at a double-digit rate, more than doubling its revenues in the last three years. But despite its annual revenue numbers increasing by the billions, Salesforce has kept its quarterly revenue growth above the 20% mark.
The company spends a lot of money on customer acquisition- nearly 46% of its total revenues were spent on marketing and sales. But that cannot be the only reason for its growth, although it has certainly helped keep the momentum going. Another factor is its dominant position in the customer relationship software market.
Salesforce has come under serious threat from Oracle Corp. (ORCL, Financial) trying to muscle its way into the software-as-a-service space and Microsoft Corp. (MSFT, Financial) beefing up its Dynamics 365 software and exploiting its LinkedIn acquisition. The competition is slowly getting into shape to eat into Salesforce’s market share, but they still have a ways to go before they can effectively challenge and slow its revenue growth.
Customer relationship management software is the fastest-growing segment within the business management software space, which also includes enterprise resource planning and other software. It is expected to grow at a compounded annual rate of 13.7% until 2021.
According to Gartner, the CRM software market grew 12.3% in 2015, with Salesforce holding a commanding 19.7% market share, followed by SAP SE (SAP, Financial) with 10.2% and Oracle with 7.8%. The CRM market is already dominated by big vendors, but the growth of cloud infrastructure services and cloud vendors will only accelerate the rate of migration toward big vendors as enterprises around the world find it cheaper and easier to do business with them.
The CRM market is expected to hit $37 billion this year and grow at double-digit rates for the next five years. With big vendors accounting for less than half of the market, the growth potential is quite high and there is enough space for multiple companies to compete and still grow. As the leader of the segment, Salesforce will continue to grow at double-digit rates for the next several years.
Salesforce has always been an expensive stock, demanding a premium from investors. The stock trades around seven times sales, leaving a very small margin for error. Wait for a bad quarter or bad news before pulling the trigger.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
