A "fourth industrial revolution" that involves a fast-paced digital transformation could provide a tailwind for the Salesforce (CRM, Financial)'s stock price. The company looks set to capitalize on favorable operating conditions through its Einstein assistant, as well as via the integration opportunities provided by recently acquired Mulesoft.
Although the company has ambitious targets and a high valuation, further acquisitions plus strong organic growth could allow it to produce further stock price gains in the long run.
Potential catalyst
In the last year the Salesforce stock price has risen 54%. That’s significantly ahead of the S&P 500, which is up 15% during the same time period.
A potential catalyst on the Salesforce stock price could be the company’s Einstein assistant. The artificial intelligence (AI) component of its platforms looks set to become increasingly important in a world where AI is likely to permeate an increasing number and range of services as part of the "fourth industrial revolution."
Einstein provides over 3 billion predictions and insights everyday across the company’s platforms. It has the potential to make a business more efficient, since it has the capacity to reduce a company’s average handle time (AHT) when it comes to resolving customer queries and issues. It uses a mixture of machine learning, natural language processing and consumer history to handle customer requests. This means that routine requests are often handled by bots, while customer service agents focus on higher-priority tasks. This could help to improve customer service levels if waiting times and faster resolutions are delivered, which may mean higher sales and profitability for companies using the technology in the long run.
With 85% of customer interactions in the customer service segment set to be handled by bots by 2020, the segment could offer high growth potential. Since Salesforce has a strong position in the industry, it could provide its sales growth with a tailwind over the next few years.
Growth potential
Salesforce’s recent acquisition of Mulesoft has the potential to boost the performance of its core offering. In the most recent quarter, the $6.5 billion acquisition contributed $122 million in revenue, with its Anypoint Platform proving popular among customers that are seeking to embark on a process of digital transformation. Looking ahead, a greater number of companies are set to focus on integration and connecting the various parts of their business. Therefore, Salesforce could be well-placed to capitalize on rising demand over the medium term.
Further acquisitions could take place over the coming years. It has made numerous acquisitions in the current year, and holds stakes in a range of companies that could become acquisition targets. Its ability to quickly integrate an acquisition and deliver its offering to existing and new customers could provide it with an advantage versus slower-moving competitors. In a fast-moving marketplace where technology is changing at a rapid rate, the ability to identify acquisition targets and integrate them successfully may provide the company with improving growth prospects.
High expectations
A potential risk facing Salesforce is its high expectations. The company has set out highly ambitious plans regarding revenue growth over the coming years, and this may have led investors to have priced-in its future growth potential.
For example, it is aiming to double its revenue to $20 billion by 2022, with further revenue growth targets of $40 billion by 2028 and $60 billion by 2034. With the stock having a price-earnings ratio of 157, investors may have factored in a growth rate that could be unachievable over a long-term timeframe. Inevitably, economic growth will not remain at current levels in perpetuity, while a larger size may eventually equate to a slowing growth rate.
The overall prospects for the company, though, appear to be bright. The world is starting to experience a technological revolution that could fundamentally change a wide range of industries over the coming years. With Salesforce being a dominant player in its key markets, it could help to spearhead the digital transformation. Its customers seem to be relatively reliant on it, with the company having a remaining performance obligation of $21 billion. This indicates that repeat business will be high, while further acquisitions could provide a boost alongside impressive organic growth rates over the long term.
Verdict
The prospects for the Salesforce stock price appear to be positive, with the company set to capitalize on the growth potential offered by the "fourth industrial revolution." Its acquisition of MuleSoft could catalyze its financial performance, while further acquisitions could be ahead. Its Einstein assistant could become increasingly popular among customers and may have a significant impact upon its future earnings growth rate.
Although the stock has a high valuation and ambitious growth targets, it seems to have a sound strategy and a growing market in which to operate. As a result, it could offer further capital growth after a strong 12-month period versus the S&P 500.
