Salesforce Stock: A Compelling Buying Opportunity Amid Recent Dip

Salesforce Stock's Long-Term Trends Signal A Buying Opportunity (NYSE:CRM)

The stock trades at multiples below the historical average due to the recent sell-off, and growth opportunities do not seem to be priced in. Salesforce (NYSE:CRM)(NEOE:CRM:CA) first came to my attention after the significant decline in the stock price at the end of May. At that time, I read a few articles online and was discouraged by the number of pessimistic takes and the fact that no one was really able to explain what the business did. Two months later, the stock is up 17% from its dip, but it seems to have a long way to go until a full recovery. The stock chart is hardly exciting, with the stock price being at the same levels as at the end of 2020. I decided to start covering the company after the dust settled, the number of pessimistic takes declined, and the market had calmer feelings about the company. That time is now. Salesforce provides business-critical software to various industries, and benefits from strong tailwinds. Its data offerings continue to grow and other features remain highly demanded. The market reaction to earnings slightly missing expectations seems unjustified. The stock appears undervalued based on historical multiples and the current stock price doesn't reflect the growth opportunities. Therefore, Salesforce receives a "Buy" rating. Salesforce has always created question marks for me. I understood the company's purpose in general, but I found it difficult to really understand its software and business proposition. It just seemed easily replicable. So, we'll start this article by trying to understand the business. Salesforce calls itself the "global leader in customer relationships management ("CRM") technology", hence the stock ticker. It enables companies to connect with their customers through Salesforce software that is enhanced with data and artificial intelligence. The company employs a subscription-based business model. The main platform is called the Customer 360 CRM platform. It has features to help with many generic business functions. Users can test and choose which of these features they need for their businesses. Some of these features are explained below: To summarize, Salesforce aims to help its customers improve their customer interaction by providing tools for different interaction channels, including sales, customer service, marketing, and commerce. It also offers data integration and analytics solutions to identify opportunities and act on them. These features are crucial for almost all businesses. Every single company has customers it interacts with, and Salesforce allows this interaction to be smoother and improves the overall customer experience, which could result in higher sales, higher customer retention, and satisfaction. Some of the crucial factors for companies to prefer Salesforce compared to other software products available are its scalability, industry-specific customization, superior data insights, and no-code approach. In addition to the Customer 360 CRM platform, Salesforce provides Slack, an internal communication application for businesses. Thanks to the increasing importance of efficient customer interaction and internal communications systems for businesses, Salesforce has managed to remain relevant, increasing its sales and operating margins significantly. It has maintained a stable return on assets ("ROA") while growing. Salesforce has been an incredibly steady and growing business since its IPO in 2004. The company has managed to increase sales every single year since then. This is not a coincidence. There are strong growth tailwinds that this company benefits from. Firstly, the importance of better customer service and interaction has increased significantly over the years. Salesforce states that "52% of customers will abandon online purchases if they cannot find the information they are looking for." Consumers are now more impatient and want to get what they want with ease. Poor customer relations could result in low customer retention and acquiring customers costs 6-7x more than retaining the existing ones. As companies understand this, they continue to invest in their customer relation capabilities, which benefits the largest company in the space whose ticker is literally CRM. Additionally, especially with the pace at which companies are transitioning to hybrid or remote working environments, the importance of internal online communication has been increasing. Slack, acquired by Salesforce in 2021 in the middle of this transformation, benefited a lot. Its monthly active users increased from 14.6 million in 2019 to 54.1 million in 2023. Moreover, with the advancements in artificial intelligence, companies have started to invest more in their data capabilities to extract more business-critical insights and act on them. This has meant higher demand for Salesforce's existing integration and analytics features. The table from the company's Q1 2025 earnings presentation shows revenue growth by features of the Customer 360 platform. The integration and analytics sales have grown significantly more than other features every single quarter since Q1 2024 and have shown the highest growth in Q1 2025. This indicates that the demand growth remains high. Finally, the company significantly benefits from switching costs. Once a customer starts using the Salesforce platform, it requires time, effort, and money to switch to another CRM platform. This helps Salesforce retain customers better. The company released its Q1 2025 earnings on May 29, and it is safe to say that it disappointed investors. Although revenue increased nearly 11% year-over-year, it slightly missed the consensus. Operating cash flow and free cash flow were significantly up year over year. Management maintained the full-year FY25 revenue guidance, indicating an increase of 8%-9%, and initiated the second quarter revenue guidance, indicating an increase of 7%-8% year-over-year. Despite the revenue growth guidance, these growth rates were slightly lower than expected, and investors immediately punished the company. The stock, which had been performing in line with the broader market since 2020, declined 20% within the day. This seems like a huge reaction to a small miss in sales compared to what was expected. However, judging the market is rarely useful in these situations. The more important thing is to understand the mindset of investors. Clearly, investors care about growth, and want to see Salesforce continue selling and earning more. This understanding helps us evaluate Salesforce as an opportunity better. I do believe the company will continue to benefit from the mentioned long-term trends, and initiatives like trimming the workforce should help the company become more profitable. Projecting earnings accurately is always difficult for software companies, as evidenced by the last quarter and the recent decline in stock price. Therefore, I will be evaluating the multiples that this company trades at. There are two approaches: comparing the multiples to the broader sector and comparing the current multiple to the historical. Seeking Alpha's valuation grades help us understand the multiples relative to the sector the company is in and to Salesforce's 5-year average multiples. We observe that price-to-earnings and various EV-to-profits multiples appear either in line with or slightly above the sector median. However, all of these multiples are lower compared to Salesforce's 5-year average. This observation is similar to my calculations. Observing the adjusted price-to-earnings trend over the last eight years shows that the stock was priced at higher multiples before, indicating room for upside. The market seems more pessimistic about Salesforce's future than it was before, and with sustained growth opportunities, this pessimism appears unjustified. Salesforce is not an easy business to understand. To some, it may appear easily replicable or unnecessary. However, historical trends suggest otherwise. The company provides critical business software required for internal and external communications. It directly affects users' relationships with their customers, helping them retain and increase sales. Additionally, users find it difficult to switch to another CRM tool once they start using Salesforce due to high switching costs. Companies increasingly realize the importance of a good CRM tool, and this trend is likely to continue. As the largest company in the industry, Salesforce is poised to benefit. With the recent decline in the stock price, it appears undervalued compared to historical levels.

Salesforce's Stock Is Dirt Cheap (NYSE:CRM)

My previous bullish thesis about Salesforce (NYSE:CRM)(NEOE:CRM:CA) did not age well as the stock price decreased by around 7% over the last three months, while the broader market rallied by 10%. The reason for CRM's poor performance compared to the broader U.S. market is a massive sell-off after the earnings release. In my analysis I explain why I remain bullish. The post-earnings panic was an overreaction, in my opinion. The company's fundamentals are still-rock solid, and I see several positive developments. CRM's valuation became much more attractive after the recent dip, making the stock a no-brainer at current prices. All in all, I reiterate a "Strong Buy" rating for CRM. CRM released its latest quarterly earnings on May 29, when the company surpassed EPS consensus estimates but missed on revenue. The top line grew by 10.7% on a YoY basis, and the adjusted EPS expanded from $1.69 to $2.44. The EPS improvement was of high quality since it was achieved by the expansion of the operating margin from 13.6% to 18.8% YoY. Strong Q1 performance enabled CRM to further improve its financial position. The company had $17.7 billion in cash as of the latest reporting date, and its financial leverage is low. Having a sound balance sheet is crucial because it provides the company with substantial financial flexibility, which can be exercised to invest in new growth opportunities. Past performance is not a guarantee of future victories, but CRM's historically high profitability adds optimism regarding the company's ability to reinvest successfully. The upcoming earnings release is scheduled for September 4. Quarterly revenue is forecasted by consensus at $9.23 billion, which indicates a 7.3% YoY growth. The adjusted EPS is expected to expand further, from $2.12 to $2.36 on a YoY basis. As we see below, there were 28 downward EPS revisions over the last 90 days, which signals that Wall Street analysts are quite cautious about the FQ2 2025 earnings release. I do not share Wall Street's cautious sentiment. I see no catastrophe in CRM's Q1 revenue miss because it was insignificant. A $14 million revenue miss is just 0.15% of the company's Q1 revenue, which is almost invisible. The most important to me is that revenue continues growing at a notable pace and CRM demonstrates strong operating leverage which results in the EPS expansion. From the long-term perspective, the EPS dynamic forecast looks quite impressive. According to the below table, CRM is expected to deliver double-digit YoY EPS growth in the next ten out of eleven quarters. The fact that the market highly likely overreacted to the slight revenue miss in Q1 is a massive insider buy during the earnings aftermath. According to the source, one of the company's directors, Mason Morfit, bought 428,000 CRM shares worth around $100 million on June 3. Such a massive insider buy from the company's co-CEO speaks volumes about the management's confidence in CRM's bright future prospects. The company continues demonstrating revenue growth and financial discipline, which is a massive blend to deliver value for shareholders. The company continues seeking for more efficiency and recently it was announced that CRM trims 300 more positions. While this round looks insignificant compared to the company's total above 70,000 headcount, the management's commitment to keep an eye on costs is the most important. Moreover, I like the thought approach as CRM needs to balance between seeking efficiency and sustaining its massive R&D budget, which is close to historical highs. The fact that the company's staff was recently ordered to return to office also demonstrates the commitment to improve efficiency of internal operations. The R&D budget is deployed efficiently as the company continues consistently rolling out new cutting-edge features to its suite of products. Last week the company launched its Einstein Service Agent, which is a fully autonomous AI agent that "boasts an advanced understanding of context and nuance". To conclude the core part of my analysis, I think that there are no reasons to be less bullish about CRM. The recent sell-off looks like a noise to me because CRM's fundamentals are still rock-solid and improving further. The top-line keeps growing, operating leverage drives the EPS expansion, CRM's financial position is a fortress and the management's commitment to efficiency and innovation is still intact. The stock rallied by 13% over the last 12 months, significantly lagging behind the broader U.S. market. This year, CRM demonstrates a decline so far with a 3% YTD share price decrease. Despite Seeking Alpha Quant assigning CRM a low "D" valuation grade, I believe that the stock is undervalued from the multiples perspective. I think so because CRM's current valuation ratios are notably lower than the company's historical averages across the board. I am using the same 9% WACC, which aligns with the range recommended by valueinvesting.io. I am not changing my WACC assumption because the Fed still has not made any moves in its monetary policy. Consensus revenue estimates for FY 2025-2034 project a 9.7% CAGR, which I incorporate since the level is quite conservative in light of CRM's bright prospects. For the base year, I use a TTM 27.2% FCF ex-SBC margin and expect a 50 basis points yearly expansion. I ignore the net cash position for CRM since it is insignificant compared to the company's scale. According to my DCF template, the business's fair value is slightly around $413 billion, which means there is a massive 66% upside potential. Such a big discount for the undisputed leader in its niche might be too good to be true. Therefore, I want to simulate a more conservative scenario. For the second scenario I assume a 7% revenue CAGR over the next decade and no FCF margin expansion. I will leave other assumptions unchanged for this simulation. In the above table we can see that even with modest revenue growth and no profitability expansion over the next decade, CRM is still 20% undervalued. The margin of safety looks wide, meaning that the valuation is indeed compelling. CRM stock's seasonality analysis over the last decade suggests that usually the timeframe between August and December is historically weaker than the first seven months of a year. However, as we saw above, CRM's performance was not very good YTD. This might mean that this year does not follow historical patterns and we can expect the stock's stronger performance during the remainder of 2024, especially given the massive undervaluation. CRM operates in a highly competitive environment where it competes with giants like Amazon (AMZN), Microsoft (MSFT), Google (GOOG), Oracle (ORCL). Moreover, the technological landscape is evolving rapidly and every year new startups emerge that can potentially bring more threats to CRM. The company has been quite successful in dealing with the intense competition, but past success is not a guarantee of future wins. CRM's financial power is much lower compared to companies with trillions in market caps. It is important to understand that CRM does not only compete directly with these giants but also competes for the best talent and potential new acquisitions. The sell-off that happened to the stock after the FQ1 2025 earnings release was massive. As I described in the core part of my analysis, the earnings miss was not significant. Nevertheless, due to CRM's prior flawless earnings surprise history, investors were extremely disappointed even with a shallow revenue miss against consensus forecasts. The stock lost 19.7% of its value in one day on May 30, the next day the report was released. Potential investors should be aware that expectations around CRM are inherently high due to the company's excellent performance, and even a small earnings miss might lead to a big sell-off. To conclude, CRM is still a "Strong Buy". I firmly believe that the recent dip was caused by the market overreaction as fundamentals remain rock-solid, and the company is expected to continue consistently delivering double-digit EPS growth over the next several quarters. The valuation with a massive upside potential means that the stock is a no brainer, in my opinion.