Among the industries that make up the tech sector, the software application industry is projected to have strong growth.Â
Analysts are projecting annual growth rates of 18% through 2019 and 30% over the following years to 2024.
Enterprise cloud computing solutions developers are well positioned to benefit from this trend. Among these companies, which have a specific focus on customer relationship management, is Salesforce.com Inc. (CRM, Financial).
The San Francisco-based cloud computing company has an advantage because it is considered the preferred seller for digital transformation. Furthermore, its $6.5 billion acquisition of MuleSoft in March has improved the company's merger and acquisition track record, placing Salesforce on the frontlines of driving customers' traditional needs toward a digital solution.
Through the sale of customer relationship management products and commercial applications for social networking, Salesforce.com has grown its revenue over the last 10 years. As illustrated in the chart below, the company’s annual turnover has climbed 28% since 2013.Â
According to GuruFocus, Salesforce has one of the highest growth and profitability ratings of the entire industry, scoring a 7 out of a total of 10. That is mainly the result of a net income margin of 4.3% versus an industry median of 3.84%, a three-year growth revenue rate of 18.3% versus an industry median of 6% and a three-year earnings before interest, taxes, depreciation and amortization growth rate of 42.1%.
With regard to the trailing 12-month EBITDA margin, which is 13.13%, Salesforce is almost on par with the industry average.
Net earnings are projected to grow 72% to $2.32 per share in 2018, 17% to $2.71 per share next year and than 27% per year from fiscal 2020 onward. Sales are expected to be $13.12 billion in fiscal 2019, $15.74 billion in 2020 and $18.53 billion in 2021.
The balance sheet is also solid. GuruFocus has assigned a financial strength rating of 7 out of 10. The company has approximately $7.2 billion in cash on hand and securities and about $4 billion in total debt. The interest coverage ratio is good. At 4.5, it shows that the company can easily carry the financial burden. The company’s operations can generate $2.7 billion to $3.1 billion in free cash flow every year, of which 85% can be used to grow the business.
While the company is not distributing dividends to its shareholders, for the 52 weeks through Aug. 24, holders of the common stock have seen their investments appreciate 63%. Salesforce outperformed the S&P 500 index by more than 43%.
The stock is not done rising. For the next 52 weeks of trading, the consensus is for enhancing holdings. Forty-one out of 45 analysts have a ‘buy’ or ‘strong buy’ recommendation. Three analysts suggest holing the stock. Only one analyst expects it to underperform.
I would wait for the stock to retreat to between $138 and $142 before buying shares. The current share price of $151.47 is above the 200-, 100- and 50-day simple moving average lines. The stock is only 2.4% below the 52-week high of $154.88 and about 65% above the 52-week low of $92.11.
The price-book ratio of 10.36 versus an industry median of 3.12 and price-sales ratio of 10.36 versus an industry median of 2.60 are indicating non-compelling current valuations.
According to the Peter Lynch chart, the share price is far above the earnings line value of $9.6.
The average target price is $156.15 per share.
The company is reporting 742.91 million shares outstanding, of which nearly 87% is held by institutions and 5.26% is held by insiders.
Disclosure: I have no positions in any securities mentioned in this article.
