Apr 15, 2021
[12 min Read]
I orginally made this post on my blog (http://tedinvests.com/posts/) and I'm now posting it on Utradea. I encourage you to read the post on my blog as it provides graphs and pictures so you can get a better idea of this company.
Salesforce is the world's #1 customer relationship management software (CRM) platform. Customer relationship software refers to tech solutions that help businesses manage communication with clients. A CRM tool lets you track current and potential customers, identify opportunities in terms of sales, record service problems, and manage marketing campaigns in a centralized location. The information that anyone in a given company might need is available to them through such software. So why is a CRM system so important? A CRM system helps companies collect data that is easy to understand and with that data they can learn their customer base, identify weaknesses in their company, track the progress of their goals, etc. In other words, a CRM system allows a company to stay organized. In companies both large and small it's easy for miscommunication to happen. In the cases that a problem does happen, a CRM system would allow people to see what happened in the past as well as what potential ways they can fix the problem. These systems allow companies to integrate tools such as document signing, accounting and billing, and surveys into a neat cloud system that gives an overview of ones customer.
In this post we'll take a look at the opportunity ahead of Salesforce. While I don't think anyone really denies that this company has a strong brand and is in an industry that is bound to grow, what exactly is the potential that Salesforce can live up to? To answer this question, we'll take a look at CRM's TAM opportunity, fourth quarter and full year fiscal 2021 results, recent developments, management team, risks, and future opportunities. Make sure to read to the end to get my opinion on if this company is a buy or not and my discounted cash flow analysis.
Note - I use Salesforce and CRM interchangeably
“We never could have predicted a year ago what was in store, which makes me incredibly proud of how well we pivoted our company to adapt to this pandemic world … We had a record quarter and year by innovating more and faster than ever, enabling our customers to be successful from anywhere, and becoming more relevant and strategic than ever. And we continued to serve all of our stakeholders in a time when they needed it most.” - Marc Benioff, CEO of Salesforce.
While looking into this companies TAM opportunity I noticed something that might throw off a lot of investors. CRM's market capitalization is larger than their TAM. TAM relates to the revenue a company can make within a market within a given year. Market capitalization is the total value of a company that is calculated by multiplying the total number of shares outstanding by the present stock price. Market cap often trades at multiples of the revenue and that multiple ranges depending on the industry (often higher in the tech space). In other words, market cap should be thought of as discounted future cash flows.
So what is CRM's total addressable market and what is there revenue? CRM identified that their total addressable market will be $175 Billion by the year 2025 with a compounded annual growth rate (CAGR) of 11%. Their total addressable market can be segmented into sales, service, market/commerce, platform, and analytics/integration. They hold 20% market share in their industry with Oracle in the #2 spot at 5.3%. Additionally, with their acquisition of Slack (refer recent developments section) they identified their TAM opportunity growing to add another $50 billion by 2026 (currently $21 billion). When looking at revenue, they came in at $5.82 Billion which means this company has a tremendous opportunity ahead to grow. As the economy opens back up, more businesses will be looking to pay for services that Salesforce offers.
Important Points to Address
Additional acquisitions that I will not go into detail on include:
As we can see Salesforce has done many acquisitions in order to get closer to being able to offer businesses the services that will allow them to get a complete view of their customers. These acquisitions on the one hand have been very costly but they make great additions to CRM in the long-term. It's questionable whether all of the businesses CRM has acquired will pay off as they're expected to, but as we will see in the next section CEO Marc Benioff understands what he's doing.
CRM's management team is so large (partly due to the acquisitions) that I will not go into detail on all of the members. I encourage you to dive deeper into the management team of Salesforce to get a better idea of how this company is run.
CEO - Marc Benioff
Marc is the CEO of Salesforce and under his leadership he has created the #1 provider of customer relationship management software globally. Marc founded Salesforce in 1999 and was named “innovator of the Decade” by Forbes and is recognized as one of the World's 25 Greatest Leaders by Fortune. Before launching Salesforce, he spent 13 years at Oracle Corporation (one of Salesforce's main competitors) as Vice President. At the age of 15 he founded his first company Liberty Software which created video games. Additionally, he is a member of the World Economic Forum and has gave $250 million to the University of California to build the UCSF Benioff Children's Hospital. What strikes me most about Marc is that not only does he have an eye of innovation but he gives back to the community. Also, he worked for one of their top competitors, Oracle, for 13 years and still managed to outpace them by starting his own company. With that being said, he has an idea of how his competitors think and how the Customer relations software industry works. After knowing what Marc has been able to accomplish, it's no surprise that he's acquired so many businesses. Surely Marc is thinking longterm with all the acquisitions he's made and I expect many of them to turn out as he's planned.
President and Chief Strategy Officer - Alex Dayon
Alex Dayon is the President and CSO of Salesforce. Alex has multiple patents and joined Salesforce back in 2008 through the acquisition of InStranet which he served as CEO during his time there. Before joining Salesforce, Alex was one of the founding members of Business Objects SA which he led the product group for over 10 years. In terms of education, he holds a master's degree in electrical engineering from Ecole Supérieure d'Electricité in France. I trust that Marc surrounds himself with the best management team and Alex is a great fit to the Salesforce team. Similar to Marc, Alex founded a company and led it to success over the course of time. Alex understands the competitive landscape with which they work and I trust he'll help lead Salesforce to newer heights.
President and Chief Financial Officer - Amy Weaver
Amy Waver is the President and CFO of Salesforce and is a member of the company's executive committee which reports directly to Benioff. Prior to going Salesforce in 2013, Amy served as the Executive Vice President of Univar Solutions Inc. She also served as the Senior Vice President of Expedia Incorporated. In addition to the experience she has in finance, Amy practiced law at Cravath and multiple other law firms where she concentrated on project finance, credit agreements, joint ventures, and more. With Weavers understanding of Finance and law, she knows not only the technical aspects of finance but the legislative as well. With her as CFO I have no doubt that Salesforce will continue to be in the proper financial standing that it needs.
Additional Executives not mentioned include: Parker Harris (Co- Founder), Adam Selipsky (CEO of Tableau), Brent Hyder (Chief People Officer), and more.
Salesforce's steep learning curve puts off potential customers - There are so many aspects to Salesforce's services that there is a rather large learning curve. It's been noted that a couple weeks of training is the bare minimum in order to effectively use the system. This steep learning curve could make some potential customers choose to adopt a more simple system. Although, once the system is mastered the possibilities are endless in terms of customization.
Cyber-attacks - With any company the possibility of a cyber-attack is always present. For SaaS companies (software as a service) such as CRM, this risk is one that is of utmost importance because if they get hacked then customers information gets leaked. If customer information gets leaked then any potential customers will be worried that CRM is not as a reliable system as it was made out to be.
Expanding services beyond CRM may fail - CRM, as shown in the recent developments section, has been expanding into other markets. For example, with their purchase of Tableau, they ventured into the analytics and integration space. Moreso, they ventured into the business communication space with Slack. Both those companies face significant competition from companies such as Microsoft (think MS Teams), Amazon Web Services, and many more. Thus, CRM is facing competition from so many fronts and while they do have $4 billion sitting in cash and cash equivalents, that may not be enough to continue expanding successfully on all their services. When you're fighting off competition from the likes of Amazon and Microsoft, innovation needs to be kept up.
Salesforce successfully implements their new acquisitions - Salesforce offers more than just customer relations management. Their acquisitions have been quite costly and if they play out as predicted we will see not only revenue grow, but margins as well. CRM is trying to offer a complete digital ecosystem including marketing, sales, analytics, communication, and more. Covid has accelerated the digital movement and as Covid becomes a thing of yesterday, we want to see CRM gain marketshare in the industries in which they've positioned themselves. Going forward it will be important to carefully track margins and growth of their individual businesses rather than just revenue in total.
Businesses continuously adopt AI (artificial intelligence) - Salesforce implements AI into their services and as AI continues to be adopted we can expect companies to be attracted by CRM's pace of innovation. Salesforce noted that Internal HR bots handled 83% of their total chat engagements via their Einstein Bots. Additionally, many companies us AI when modeling things such as consumer engagement or consumer product recommendations in the case of e-commerce. CRM continues to advance their AI capabilities and as that advancement occurs, we can expect potential customers to take notice and implement CRM into their businesses.
Salesforce is a rapidly expanding customer relationship management company. They've innovated at an extremely rapid pace since their founding in 1999 by acquiring businesses that provide services beyond customer relationship management. While they've been growing rapidly, they're also spending money just as fast. Going forward we need to pay attention not only to the growth of their original business model (CRM), but also their ventures into communication (Slack), analytics (Tableau), marketing (ExactTarget), and more. Investors may be reluctant to buy this stock as they've always traded at a premium as shown by their P/E ratio of 49. For me to buy this stock it would have to fall under $200 and at that point the risk/reward is attractive.
(DCF calculation and sources provided on my blog: http://tedinvests.com/posts/)