Salesforce.com Inc.’s (CRM, Financial) stock price has risen nearly 50% in the last 12 months. The stock has been surging despite the company trading at above seven times sales because it has reported above 20% growth every quarter. But is it worth buying Salesforce now or should investors stay away from the stock? Here are a couple reasons why Salesforce will remain the company to beat for years to come.
Number one position
Being number one is everything in the technology world. It is never to easy to become the top player in the technology market, but the ones that do stay there for a really long time. There are plenty of examples of this, including Microsoft’s (MSFT, Financial) Windows, Apple’s (AAPL, Financial) iPhone, Google’s (GOOGL, Financial) Android and so on. Salesforce is the number one player in the customer relationship management cloud software market, and the company spends nearly half of its revenue on customer acquisitions. The higher its revenue goes, the more money it will spend on attracting customers, and the cycle continues.
Favorable market conditions
The growth of cloud computing has had a profound impact on how we buy our software products. Gone are the days of buying software for an annual license. The pay-as-you-go model, coupled with the advantages of cloud, makes it a whole lot easier for businesses to start using software applications. As more and more companies shun traditional IT infrastructure for public cloud, adoption rates for software-as-a-service products will only increase.
According to a report from Zion Market Research, the global customer relationship management services market was valued at approximately $4.80 billion in 2016 and is expected to reach approximately $30.40 billion by 2022, growing at a compound annual rate of approximately 36% between 2017 and 2022.
This anticipated double-digit market expansion is great news for Salesforce because, as the leader of the segment, it will be able to continue its current growth rate. While competition from Microsoft and Oracle (ORCL, Financial) will become more intense over the next several years, there is enough space for all the players in this market.
To validate this point, take the infrastructure-as-a-service market as an example. Microsoft Azure has been growing at or above triple digits for the past two years, however, Amazon Web Services, the leader in public cloud, has been able to grow in excess of 40% simply because the overall market itself is expanding at a strong pace, allowing two strong players to post stunning growth rates.
Salesforce is still expanding its products
The company has been laser-focused on the CRM segment, and products like Sales Cloud, Marketing Cloud, Service Cloud and Community Cloud were built to address that single segment and to meet an enterprise's marketing needs from end to end. The breadth of the product line is what makes Salesforce stand out. The company has also steadily ramped up its investments to exploit artificial intelligence, internet of things and mobile to strengthen its product positioning, which will help the company retain its leading position in the market.
Growth looks promising
As a result of these factors, Salesforce sits in a strong position to continue its current growth rate over the next several years despite increasing competition. In addition, it is a great company to invest in. At seven times sales, however, most of the current growth expectation is already priced into the stock, leaving a very narrow margin for error. Investors should wait for a pullback or a bad quarter to buy the stock. It might be very rare, but if you remain patient the opportunity will eventually present itself.
Disclosure: I have no positions in the stock mentioned above and have no intentions of initiating a position in the next 72 hours.
