As the old saying goes, a “rising tide lifts all boats,” referring to how most companies tend to benefit from a rising economy. While we certainly don't have a rising economy right now, the tide is still rising for specific sectors. In this article, we will go over two of my favorite stocks that are poised to benefit from the long-term growth trends of digital transformation and renewable energy.
1. Salesforce
Salesforce (CRM, Financial) is a global software leader which is most famous for its customer relationship management software, from which it gets its stock ticker. Every business needs CRM software to capture customer data and assess future opportunities. Salesforce is poised to benefit from the growth in the big data industry, which is forecasted to grow at an 11% compounded annual growth rate and be worth $273 billion by 2026 according to estimates from Markets and Markets. In addition, businesses are digitally transforming their technology from legacy applications to cloud-native software applications. Therefore Salesforce as a market-leading Software as a Service (SaaS) platform is poised to benefit from this trend. The digital transformation industry is forecasted to grow at a rapid 22.1% growth rate per year and be worth over $2.1 trillion by 2030, according to a study by Straits Research.
How does the sales platform work?
The Salesforce sales platform helps salespeople use their time effectively. For example, let’s say a marketing team ran a lead generation campaign (a "lead" is a potential customer" and captured a few senior VPs who had requested a demo. In Salesforce, these important leads can be scored using Artificial Intelligence technology as “high priority." Therefore, sales reps can focus only on the leads which are expected to bring in the highest average contract value and show the most intent in doing so. This prioritization helps to improve team productivity and ultimately drive greater revenue long term.
Growth by acquisitions
Salesforce has become a leader in its market, and its software platform is used by many businesses around the world. This company is a true technology pioneer and has also been growing by acquisitions in order to build out its platform.
For example, in 2019, Salesforce acquired the business visualization tool Tableau for $15.7 billion. This tool helps companies manipulate, extract and visualize their big data, which is a growing need for businesses.
In 2021, Salesforce acquired the business chat platform and team collaboration tool Slack for a staggering $26 billion. Industry analysts were skeptical at the time, but I believe the upsell synergies Salesforce planned were a key driver in the decision.
Growing financials
Salesforce has a track record of high growth and continued to generate strong financial results in the second quarter of 2022. The company generated $7.7 billion in revenue for that quarter, which increased by a rapid 22% year over year.
As a software business, Salesforce has a high non-GAAP operating margin of 19.9%, which was down 50 basis points year over year but has been on an upward trend over the prior three quarters.
The company also generated solid earnings per share of $0.07 in the second quarter, which surpassed analyst estimates by $0.08. Free cash flow did decline by 24% year over year, although this was mainly driven by a $10 million increase in capital expenditures, which is not a recurring cost.
Salesforce has a robust balance sheet with $13.5 billion in cash and short-term investments as of the second quarter, which is 40% higher than the equivalent quarter last year. Total debt was $13.8 billion, but the good news is only $1.2 billion of this is short-term debt (due within the next two years).
Valuation
Salesforce is trading at a forward price-earnings ratio of 34 based on Morningstar (MORN, Financial) estimates for the next full year's earnings per share, which is 41% cheaper than its five-year average. Relative to competitors such as HubSpot (HUBS, Financial) and Adobe (ADBE, Financial), Salesforce trades at the cheapest price-sales ratio, which is 5.13.
The GF Value chart indicates a fair value of $279 per share for the stock. The stock is trading at ~$150 per share at the time of writing and thus is “significantly undervalued."
2. Constellation Energy Corp
Constellation Energy Corp. (CEG, Financial) is the largest producer of clean energy in North America. The company generates 10% of the carbon-free energy in the U.S. This percentage is set to expand thanks to a variety of green energy initiatives implemented to combat global warming. For example, U.S. President Joe Biden plans to implement a $2 trillion accelerated investment into infrastructure. This includes a move to generate a clean “American-made” pollution-free power sector by 2035. This is expected to consist of 950 million solar panels and 30 gigwatts of offshore wind by 2030.
Constellation is poised to benefit from this growth trend as it owns a fleet of nuclear, wind, hydro and solar power generation facilities. Its current output is 32,400 megawatts, which is enough to power 15 million homes.
Solid financials
Constellation generated solid financial results for the second quarter of 2022. Revenue was $5.47 billion, which beat analysts' estimates by a staggering $1.9 billion.
The company is unprofitable on a GAAP basis, as it invests aggressively for growth. However, on a non-GAAP basis, earnings per share was $1.66 in the second quarter of 2022, which beat analysts' estimates by $1.02.
The company does have fairly high debt of $4.5 billion, but just $184 million of this is short-term debt, due within the next two years, and thus is manageable. In addition, the company has a strong cash position with $806 million in cash and short term investments.
Valuation
Constellation trades at a price-earnings ratio of 29, which is fairly high relative to the utility sector average of 16. Also, its low profitability in the most recent quarter is skewing this ratio. The company has a price-sales ratio of 1.3, which is cheaper than historic levels. Relative to other energy companies, Constellation trades at a mid-range valuation, as you can see from the chart below comparing it to Imperial Oil (IMO, Financial), ConocoPhillips (COP, Financial) and Cleveland-Cliffs (CLF, Financial).
Final thoughts
Both Salesforce and Constellation Energy are very different companies, but both are expected to benefit from secular tailwinds even amidst the current difficult economic environment. Salesforce is expected to continue to benefit from the growth in big data and the move towards digital transformation, while Constellation Energy is expected to benefit from the increasing need for energy security and renewable energy in the U.S. I personally think Salesforce will be the bigger winner in the long-term, whereas Constellation may benefit from more short-term tailwinds due to the energy crisis.
