Online and offline ad spending are combining, creating a new $30 billion marketing industry. Salesforce (NYSE:CRM) is positioning itself to exploit this massive opportunity, merging and acquiring the portfolio of businesses it needs to succeed.
CNBC's Jim Cramer says Salesforce is "in a land grab . . gunning against Oracle," but the archrivals have now agreed to work together on what CRM CEO Marc Benioff calls a "third wave of computing." Time to buy into his vision?
New industry: the fused marketing systems cloud
BIA Kelsey predicts social ad spending will jump 134 percent to $11 billion in five years. As consumers increasingly engage with brands across multiple social channels, business needs integrated social marketing platforms that help manage and monitor intricate ad campaigns.
The answer will be a "fused marketing systems" cloud industry with spending of $30 billion, out of $500 billion ad spending worldwide. Salesforce has been building a portfolio of cloud services to create this new industry with recent mergers and acquisitions like:
- ManyMoon ($25 million)
- Radian 6 ($326 million)
- Rypple ($65 million)
- Buddy Media ($689 million)
The growing collection of companies could turn the Salesforce Marketing Cloud portfolio into a true platform.
Three deals show special promise
The ExactTarget (NYSE:ET) acquisition for $2.5 billion might accelerate overall billing growth in 2014, from 19 percent to 25. Combined with a mostly in-line quarter, better enterprise fundamentals, improved sales execution, and new product launches, the ExactTarget deal acts as a positive catalyst for the second half of the company's fiscal 2014 year, causing Jefferies to raise its target price $2 to $52.
With the social.com deal it added tools for managing ad campaigns delivered via social networks. Having this single domain gives clients a one-stop interface for creating and managing campaigns for Facebook (NASDAQ:FB) and Twitter, with over 1.5 billion users between them, thus tapping this large and growing opportunity. This makes the company a "buy" according to Motley Fool.
Salesforce also announced a strategic alliance with Workday (NYSE:WDAY), another of the largest cloud-based enterprise software companies, this one focused on human resource and financial software. But it is not done yet. Salesforce still needs to do more to build out this fused marketing business, like acquiring companies within sub-segments:
- marketing agencies
- media buying desks
- ad exchange services, and
- video ad networks/servers.
As the largest and one of the earliest software-as-a-service firms, Salesforce.com defines a category and has delivered innovative products like Social Computing and Data.com. It's shown it can create industries like the service cloud.
Salesforce' record of growth
Salesforce was founded in 1999 to offer cloud-based solutions to businesses that focus on sales, service and marketing. Since the company went public in 2004, its shares have risen almost 1,000 percent, making the company worth more than $25 billion. Now its customer relationship management software defines an industry.
By supporting a common hardware, networking, and software platform in the cloud Salesforce minimizes costs, letting customers avoid capital investments in on-premise equipment and software. Its customers seem eager to pay an operating expense to Salesforce instead: its revenue has been growing at a 48 percent annual rate, from $96 million in 2004, to $2.2 billion in 2012.
Riding the 'third wave of computing'
Salesforce shares, trading at 95 times 2014 estimated earnings, gained 27 percent in the last year. The company made a profit of $76.6 million last quarter, up from a $9.8 million loss a year ago. Revenue for the period ending in October is expected to be just over $1 billion, with a profit of 8 or 9 cents per share. Salesforce has been a year-to-date performance leader of peers in its sector, leading to expectations it will continue to outperform.
Thirty seven out of 44 Wall Street analysts give CRM a "buy" or "strong buy" - but you have to "buy into Marc Benioff's vision or else . . you're not going to own the stock," says Cramer. Visionary investors who feel confident of short-term stock performance might one day make a killing riding the third wave of computing with Salesforce and Oracle in the new industry created.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any 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.