Salesforce, Inc.: Super Earnings With Big Data Tailwinds

Bjorn Bakstad

Salesforce, Inc. (NYSE:CRM) pioneered Customer Relationship Management [CRM] package and was ranked number 1 successful nan class for 2022 by IDC. Since its founding successful 1999, Salesforce has expanded its merchandise suite to see aggregate "modules" to heighten all aspects of a business from Marketing automation to customer service. Despite nan expanding title successful nan marketplace from companies specified arsenic Adobe (Marketo) (ADBE) and HubSpot (HUBS), Salesforce has precocious recorded ace financial results pinch a "blowout" net study than hit some apical and bottom-line maturation estimates. In this post, I'm going to break down its financial results earlier revealing my intrinsic valuation exemplary and forecasts for CRM stock. Let's dive in.

Data by YCharts

Fourth Quarter Financials

Salesforce reported ace financial results for nan 4th fourth of nan fiscal twelvemonth 2023. Its gross was $8.38 billion, which hit expert expectations by $391.63 cardinal and accrued by a coagulated 14.44% twelvemonth complete year. If I comparison this maturation complaint to erstwhile maturation rates, it was really somewhat faster than nan 14.19% reported for Q3,FY23. However, it was slower than nan 21.77% maturation complaint successful Q2,FY23 and nan 24.28% maturation complaint successful Q1,FY23 (all year-over-year maturation figures). Slowing maturation rates is simply a communal inclination I person spotted successful my study of galore exertion companies (see my different posts). A affirmative is nan maturation complaint diminution for Salesforce is not arsenic stark arsenic its competitor HubSpot, arsenic you tin spot successful my anterior analysis. I judge this is because Salesforce tends to target larger organizations and enterprises, frankincense it is somewhat much immune to nan macroeconomic environment. Whereas HubSpot tends to attraction connected much Small-Medium sized businesses and venture-backed startups.

Salesforce Revenue (Q4,FY23 report)

Salesforce is besides little susceptible than galore companies to nan effects of overseas speech complaint headwinds, arsenic it derives 67.5% of its gross from nan Americas, pinch nan mostly of this successful U.S. dollars. In Q4,FY23, nan institution reported $5.657 cardinal successful Revenue (from nan Americas), which accrued by a coagulated 15% twelvemonth complete year. Its 2nd largest region is EMEA, which contributed to 23% of gross aliases $1.935 cardinal for Q4,FY23. This gross accrued by 13% twelvemonth complete year, but connected a changeless rate basis, this would person accrued a accelerated 20% twelvemonth complete year. Its 3rd segment, APAC, contributed to 9.38% of full gross aliases $792 cardinal and accrued by a dependable 18% twelvemonth complete twelvemonth aliases a blistering 30% connected a changeless rate basis.

Breaking gross down by product, it is clear Salesforce is good diversified. Its Sales Cloud reported $1.8 cardinal successful revenue, which accrued by a dependable 13% twelvemonth complete twelvemonth aliases 16% connected a changeless rate basis. Given nan Sales Cloud is nan bequest level of Salesforce, this was a reasonably bully result. Salesforce has besides precocious announced plans to motorboat EinsteinGPT. This intends to merge nan viral ChatGPT exertion (based connected nan GPT-3 model) pinch Salesforce's Einstein AI. The extremity of this is it intends to thief salespeople make reports, seizure lead information, and moreover make java (just kidding). I judge this level will beryllium very successful fixed galore organizations struggle pinch information value wrong Salesforce, location is an aged joke which says it's called "Sales-force" because you person to "force" Salespeople to usage it. Then, of course, we person nan existent "buzz" astir nan AI manufacture which is forecast to turn astatine a accelerated 37% compounded yearly maturation complaint [CAGR].

Sales and Service Revenue (Q4,22 report)

The Salesforce Service Cloud besides reported dependable financial results pinch $1.9 cardinal successful gross reported, up 11.67% twelvemonth complete year. Its Platform and Other conception besides produced coagulated results pinch $1.6 cardinal reported, up 14.3% twelvemonth complete year. This conception includes its Salesforce level App improvement situation for low-code apps successful summation to nan celebrated workplace chat level Slack, which Salesforce acquired for an eye-watering $27.7 cardinal successful 2021. The thought down Slack is to thief nonstop less emails and connection a spot for a much informal-style chat. I judge a level specified arsenic this would beryllium considered optional pre-pandemic erstwhile much labor were successful nan office. However, I judge since nan emergence of distant and hybrid moving platforms specified arsenic this person go basal successful nan workplace.

Slack besides offers various integrations pinch video platforms specified arsenic Zoom, record guidance products specified arsenic Google Cloud docs, and overmuch more. In addition, nan merchandise has efficaciously go a "platform" successful its ain correct pinch a wide assortment of apps connected offer. This includes everything from nan expertise to tally polls straight wrong nan chat to generating automated alerts from various apps. This is awesome for a mates of reasons, firstly, nan much integrations and apps installed a institution uses pinch Slack, nan much "sticky" nan level is apt to be. This is based upon nan "layering" effect, which is simply a method of expanding personification adoption. Then, of course, we person nan expertise to seizure worth from nan other services. Slack's pricing is besides highly reasonable pinch a free scheme and past betwixt $5-$10 per personification for upgrades. This type of scheme is awesome arsenic let's opportunity American Express (AXP) (a Salesforce customer) besides uses Slack. Its 77,300 labor could theoretically beryllium charged a staggering $386,500 per period to usage nan work (at $5/user for each employees).

Platform and Marketing (Q4,FY23 report)

Salesforce Marketing and Commerce gross has besides grown by a accelerated 20% twelvemonth complete twelvemonth to $1.2 billion, which is fantastic. Given Sales spell manus successful manus pinch Marketing for a "go to market" motion, nan trading merchandise is an easy cross-sell for B2B organizations.

The Salesforce Data Cloud has besides proven to beryllium immensely celebrated pinch $1.3 cardinal successful gross generated for Q4,FY23, up 18% twelvemonth complete year. This is fundamentally a customer information level [CDP] that helps organizations to bring together siloed information from aggregate sources. This tin beryllium past utilized to create a "customer graph", which helps to place relationships betwixt various factors and yet beryllium utilized to deduce insights. Given nan large information manufacture was weighted astatine $162.6 cardinal successful 2021 and is forecast to turn astatine an 11% compounded yearly maturation complaint [CAGR] up until 2026, I forecast Salesforce to use from this trend, arsenic its customers look for solutions to unlock insights from their "big data". Tableau, nan information visualization platform, outperformed expectations successful nan 4th for gross and is besides poised to use from nan aforementioned "big data" trend.

Customer Data Cloud (Q4,FY23)

Margins and Balance Sheet

Salesforce reported an operating separator of 4.3% for Q4,FY23, which was substantially amended than nan antagonistic 2.4% maturation complaint reported successful Q4,FY22. On a non-GAAP basis, nan consequence was moreover amended pinch a beardown operating separator of 29.2% reported for Q4,FY23, up substantially from nan 15% reported prior. Its non-GAAP net per stock were $1.68, which hit expert forecasts by $0.32, which was solid.

Moving forward, guidance intends to attraction connected some "short-term" and "long-term" disbursal restructuring and worker productivity, which is simply a affirmative sign.

The institution besides reported $12.5 cardinal successful rate and short-term investments. In addition, nan business reported $14 cardinal successful full debt, of which $1.18 cardinal is owed wrong nan adjacent 2 years.

Valuation and Forecasts

In bid to worth Salesforce, I person plugged nan latest financial information into my discounted rate travel valuation model. I person forecast 10% gross maturation for "next year", which successful my exemplary includes nan adjacent 4 quarters. This is successful statement pinch management's forecast of $34.5 cardinal to $34.7 cardinal for nan afloat twelvemonth of 2024. This is simply a slower maturation complaint than nan 14.4% YoY maturation complaint reported successful Q4,FY23. However, I expect this to beryllium driven by nan uncertain macroeconomic environment, which will apt consequence successful longer income cycles. For years 2 to 5, I person forecast a faster maturation complaint of 18% per year. I expect this to beryllium driven by improving economical conditions. In addition, I forecast beardown take of its EinsteinGPT, Data Cloud, and Tableau fixed nan aforementioned tailwinds crossed "big data" and AI.

Salesforce banal valuation 1 (Created by writer Deep Tech Insights)

To summation nan accuracy of my valuation model, I person capitalized R&D expenses, which has boosted nett income. In addition, I person forecast a pretax operating separator of 25% complete nan adjacent 10 years. This whitethorn look overly optimistic but it is besides only somewhat higher than nan 23% mean for nan package industry. Given Salesforce is an "above average' institution successful my eyes, owed to its beardown activity position, merchandise innovation, and precocious customer retention, I don't deem this to beryllium unachievable. Management besides announced successful its net telephone that they will beryllium progressively focused connected profitability and forecast a non-GAAP operating separator of 25% by FY26. For clarity, my forecasts are connected a GAAP basis.

Salesforce banal valuation 2 (Created by writer Deep Tech Insights)

Given these factors, I get a adjacent worth of $186 per share, fixed CRM banal is trading astatine ~$185 per stock astatine nan clip of writing, it's ~0.78% overvalued, which successful my mind is "fair value" for specified a high-quality company.

The institution besides trades astatine a price-to-sales [P/S] ratio = 5.34, which is 31.6% cheaper than its 5-year average.

Data by YCharts

Final Thoughts

Salesforce is simply a tremendous institution that has continued to diversify its business exemplary crossed aggregate areas from Sales to squad connection and now large information and AI. I judge its "modular" attack is simply a awesome strategy that makes nan upselling and cross-selling of services beautiful easy. The institution besides has a beardown civilization of "trailblazers" which acts arsenic a competitory advantage successful position of talent retention. My intrinsic valuation exemplary and forecasts bespeak nan banal is "fairly valued" astatine nan clip of penning and frankincense I will deem it to beryllium a awesome semipermanent investment.

Senior Investment Analyst for Hedge Funds. Interviewed Hedge Fund Managers and CEO's. Investment Strategy: Focus connected Deep Dive Valuation, G.A.R.P (Growth astatine a Reasonable Price). Masters successful Equity Valuation, 755+ Companies Analysed.