Salesforce: Thriving Amidst Market Chaos, But Wait To Buy
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Summary:
- Salesforce’s AI-driven platform, Einstein, and its new Genie data pool, offer valuable tools for businesses to adapt to the new sales landscape.
- The company is strategically restructuring its operations and finances to improve operating margins and manage expenses.
- Macro environment uncertainties, increased competition in AI, and sensitivity to economic changes pose potential risks to Salesforce’s growth.
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Salesforce (NYSE:CRM) has emerged as the leading player in the ever-evolving sales landscape, offering a comprehensive suite of tools and services to help businesses adapt and thrive in today’s competitive market. The company’s innovative product offerings focus on meeting changing customer expectations, and its emphasis on employee experience positions it as a valuable partner for organizations looking to stay ahead of the curve. While we appreciate the attractive valuation and recognize Salesforce’s potential for growth, the current macroeconomic uncertainties, coupled with the stock’s significant year-to-date performance, make us hesitant to pursue a more aggressive stance. As a result, we maintain a neutral position on the stock with a positive bias.
Adapting to the New Sales Landscape: The Value Proposition of Salesforce
In the ever-evolving sales landscape, companies must stay ahead of the curve by understanding and addressing the needs of today’s customers. Salesforce, a leading cloud-based CRM platform, offers a comprehensive suite of tools and services designed to help businesses adapt and thrive in this new environment. With its focus on meeting changing buyer expectations, streamlining technology, and boosting employee efficiency, Salesforce is a valuable asset for any organization looking to stay competitive.
Salesforce’s AI-driven platform, Einstein, enables sales teams to become trusted advisors rather than transactional agents. By leveraging AI capabilities, Salesforce helps sales reps gain deep insights into customer preferences and behavior, enabling them to deliver personalized experiences and tailor their approach to each customer. This proactive, customer-centric approach has become essential in today’s sales environment, where buyers expect tailored, informed interactions.
To further streamline technology and improve efficiency, Salesforce provides an integrated platform that consolidates various sales tools into one seamless experience. This comprehensive approach helps sales reps reduce the time spent on administrative tasks, allowing them to focus on what they do best – selling. By automating tedious processes like data entry and deal management, Salesforce enables sales teams to spend more time building relationships and closing deals.
Salesforce’s emphasis on employee experience also makes it a valuable partner for businesses looking to retain and empower their sales teams. The platform offers an array of tools and services designed to improve training, enablement, and collaboration. Additionally, Salesforce fosters a flexible work environment, allowing sales reps to work remotely and access the platform from any device, enhancing their overall experience.
2023 Drivers
Over the past year, Salesforce has demonstrated strong resilience in the face of a challenging economic environment. While the company experienced elongated sales cycles, additional approvals, and deal compression in 2022, it has since adjusted to these challenges and improved execution. As we move into 2023, we believe that Salesforce is well-positioned for a transformational year, benefiting from its market position, product offerings, and ability to cater to the demands of CFOs.
Salesforce’s comprehensive suite of products, known as the Customer 360, enables companies to consolidate their vendors, resulting in efficiency, automation, and cost savings. This not only benefits customers, but also drives multi-cloud adoption and revenue growth for Salesforce. As clients adopt more clouds, there is a multiplier effect on the company’s revenue and a decrease in attrition rate, as clients become deeply invested in the Salesforce ecosystem.
Two key product areas stand out for Salesforce in 2023 – Genie and Einstein GPT. Genie, announced at Dreamforce, is a data pool that enables real-time, actionable insights across all Salesforce products and other data lakes. By breaking down silos across a company’s various systems, Genie has the potential to revolutionize the way businesses operate. Early adopters like Ford Motor Company have already seen the benefits of this technology, showcasing its potential to drive growth for Salesforce.
Furthermore, the introduction of Einstein GPT, the first generative AI for CRM, adds a powerful layer of AI capabilities to the data pool created by Genie. This combination of data lake and generative AI technology presents a significant opportunity for Salesforce to innovate and expand its product offerings, strengthening its position in the market.
Financial Analysis
Based on the information provided and our own insights, we present a comprehensive financial and business analysis of Salesforce. The company has been focused on improving operating margins and managing dilution. Two years ago, Salesforce had an operating margin of 17.7%, and it has since increased by almost 500 basis points. The company plans to raise the margin by at least another 450 basis points this year and reach about 30% in the following year.
To achieve these goals, Salesforce has been restructuring its sales and marketing operations and improving efficiency. This includes reducing headcount, automating processes, and consolidating real estate. Over the last three years, the company has written off a considerable amount of real estate and taken advantage of lease opportunities to reduce expenses. These measures are expected to create additional leverage over time.
Salesforce is also addressing its stock-based compensation (SBC) by managing it as an expense and aiming to reduce it to below 9% in the coming year. The company is benefiting from M&A-related SBCs rolling off and is exploring ways to maintain a competitive talent pool while managing equity plans. Additionally, Salesforce has initiated a $20 billion stock repurchase program, which is expected to offset all SBC going forward.
In terms of M&A, the company has disbanded its M&A committee, which may suggest a reduced focus on acquisitions for the time being. However, this does not mean Salesforce cannot engage in M&A activities in the future. Instead, it signals that the company believes there is no need for a standing committee to meet regularly, as M&A may not be a primary focus at this time.
Overall, our analysis indicates that Salesforce is strategically restructuring its operations and finances to improve operating margins and manage expenses. The company’s focus on efficiency and growth, combined with its efforts to reduce stock-based compensation and real estate expenses, positions it well for future success.
Risks
One of the primary concerns is the company’s aggressive focus on cost-cutting and margins, which could potentially lead to lower growth and a deteriorating company culture. The ongoing changes might result in disruption and lower employee morale, posing growth headwinds, particularly when coupled with macroeconomic factors.
Another risk factor is the increasing competition in the field of AI, with companies like OpenAI, Microsoft (MSFT), and various startups aiming to disrupt the industry. If competitors manage to develop superior customer service chatbots or build chatbots trained on customer data, they could gain a foothold in the CRM industry, which might negatively impact Salesforce’s market position. Additionally, Salesforce’s decision to disband its M&A team may put the company at a disadvantage in acquiring innovative AI companies, further exacerbating competitive pressures.
Salesforce’s sensitivity to the economic environment is another risk to consider. In our view, this is the biggest risk to owning CRM shares in the near-term. The company has already experienced changes in customer buying behaviors, such as longer sales cycles, increased deal approval layers, heightened budget scrutiny, and deal compression in Q2 2022. This deterioration continued as 2022 progressed. Salesforce’s Marketing and Commerce Cloud segments are particularly vulnerable to macroeconomic fluctuations. The slowdown in the Marketing segment can be attributed to its discretionary nature, as marketing is often the first area to face cost-cutting measures and layoffs during economic downturns. The softness in the Commerce segment is primarily tied to gross merchandise value (GMV) growth, which can also be influenced by broader economic trends.
Valuation
Our analysis of Salesforce’s valuation reveals that the company is currently trading at a relatively attractive valuation, which appears to be a result of the market’s concerns about the risks we have discussed.
Note on sources: all numbers in this section come from consensus estimates and data from FactSet.
When considering the forward 12-month price-to-earnings (P/E) ratio, Salesforce is trading at 26 times, which is at the lower end of its five-year range. This indicates that the stock is relatively cheaper in comparison to its historical valuations. In addition, when compared to the S&P 500, the stock’s premium is currently at 42% on a P/E basis, an all-time low.
Given that Salesforce is a growth stock, it is also useful to examine the enterprise value-to-sales (EV/Sales) metric. At present, the company is trading at 5.6 times forward sales. While this is higher than the 4 times the company traded exiting 2022, it remains on the lower end of its five-year range.
When comparing Salesforce’s EV/Sales metric to the S&P 500, the company is trading at a 100% premium. While this may seem high, it is actually at the lower end of its ten-year range, which implies that the current valuation may be more attractive than it initially appears.
Conclusion
Salesforce has demonstrated its ability to adapt and innovate in the face of a rapidly changing sales environment. Its focus on AI-driven solutions and the introduction of the Genie data pool, along with strategic financial and operational restructuring, highlight the company’s commitment to growth and efficiency. However, the uncertain macroeconomic climate, coupled with increasing competition in the AI industry, requires a cautious approach to this otherwise attractive investment opportunity. Therefore, we maintain a neutral stance on Salesforce’s stock, with a positive bias, and recommend investors to closely monitor the evolving market dynamics and Salesforce’s performance before making any further investment decisions.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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