Salesforce.com’s (CRM, Financial) stock price has more than doubled in the last five years, a period which saw its revenues rise from $3.05 billion in 2013 to $6.67 billion in 2016. So it was not really a surprise that the stock price tracked its revenue growth. But if you look a bit closer, you will notice Salesforce has been trading in a narrow range of $70 to $80 since May of 2015. The stock price has stayed put despite the company posting double-digit revenue growth for the past several quarters and is expecting to hit 21% sales growth in fiscal 2018.
“You can see from our results, we had an exceptional third quarter. Revenue rose to more than $2.1 billion, up 27% in constant currency from a year ago.“
“We’re excited to deliver our first $10 billion revenue milestone next year, as we are initiating fiscal 2018 revenue guidance of $10.1 billion to $10.15 billion. This implies year over year growth of approximately 21%.” - Salesforce Third Quarter 2017 Earnings Call
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Quarterly revenue growth has been impressive this year, coming in at 25.5% in the first three quarters of fiscal 2017. The company also expects an above-average 10%-plus growth rate for the next year as well. However, the stock price has barely budged, trading in the $70 to $80 range for the last year and a half.
The problem Salesforce is facing comes from its valuation. As a hyper-growth stock, Salesforce has been on a bullish trend for a very long time. Even now the stock is trading above six times sales. Things may have continued in the same direction because Salesforce is perfectly capable of posting double-digit growth rates, but the competition in the software-as-a-service (SaaS) market has increased manifold after Microsoft (MSFT, Financial) and Oracle (ORCL, Financial) started upping the ante.
Although Salesforce remains the darling of the market with an above-average valuation, the increasing competition is finally taking its toll on the valuation multiples the company commands. The market realizes posting double-digit growth rates when approaching the $10 billion revenue mark is not an easy job, especially when we are talking about a software company where big names have entered the competition.
As a market segment leader, Salesforce will enjoy the benefits of growth in the SaaS segment and will continue its double-digit growth spree for some time. However, as the company gets bigger, such growth rates will not be sustainable and valuation multiples need to come down naturally. That process may have already begun, but we are not seeing it in the form of a stock price drop because growth is still strong. It is only a matter of time though.
Disclosure: I have no positions in the stocks mentioned above and have no intention to initiate a position in the next 72 hours.
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