Salesforce.com (NYSE:CRM) has made strong progress in the CRM market, and has now become the market leader. The slow transition of IT expenditure from CIOs (chief information officers) to CMOs (chief marketing officers) has opened the doors for robust growth. The stock price has followed the trend, and the stock has gained over 37% during the last twelve months. While the market has strong demand for CRM software, Salesforce.com has combined the two growing aspects of the current technological world - the company offers CRM on the cloud to ensure portability and accessibility, which aligns perfectly with the new smartphones and tablet era.
CRM on the Cloud
There are two reasons for the growth in the customer relationship management software: First reason is the availability of CRM on the cloud, which has allowed sales persons to carry the software on their mobile devices and allowed them greater accessibility. This has also eliminated the information gap which may arise between CIOs and CMOs. The second reason is the benefit of portability. In the mobile devices era, we have seen robust growth in cloud-based services, which complement the need to have the software on the go. As a result, sales teams equipped with tablets can access their CRM while in the field.
Over the next few years, SaaS-based CRM software is destined to show exceptional growth rates. Gartner research suggests that mobile CRM will grow by 500% by the end of 2014, as 30% of the sales companies will give tablets to their sales teams. Salesforce.com is the market leader in the mobile CRM segment, with 14% market share. Being the market leader will allow the company to exploit this growth opportunity and result in a substantial increase in the revenues.
Why is Salesforce.com taking the lead?
The reason for the fast growth in the revenue of Salesforce.com is its market segmentation. The smaller and rising companies have greater growth rates as compared to the ones that are already established. Same goes for the assets and facilities. Smaller businesses have lesser assets, and are potential customers for a wide array of products and services.
Salesforce.com derives the majority of its revenues from its CRM software, and the company markets the product to the large organizations, as well as small-medium enterprises. However, the main growth drivers for the company are the smaller businesses, as the majority of these businesses are still not using CRM software. This gives Salesforce.com an advantage, as it is basically targeting the small business segments, which are high in number. Overall, the worldwide CRM market is growing at around 12%.
Also, in the small business segment, the major competitor is Microsoft (NASDAQ:MSFT), and its product has a lower ranking than Salesforce.com's software. SAP AG (NYSE:SAP), the other major player in the market, only competes in the medium and large enterprises segment.
We believe that the revenues of Salesforce will continue to grow further from the small businesses. This is because the company only provides SaaS-based CRM, and does not offer on-premises service. As reported in mid of 2013, 40% of all CRM software sold were SaaS, and the number is increasing. On-premises are generally more expensive, and small companies tend to reduce their costs to a greater level. In fact, in today's market, cost reduction is crucial for even large businesses. Therefore, cost is a major factor which has been contributing to the growing revenues of Salesforce.com and will continue to do so.
The U.S market for SaaS CRM has been growing at an average annual rate of around 30%. However, as I mentioned above, the overall growth rate in the CRM segment is around 12%, and the market is heading towards maturity in the U.S. Nonetheless, the growth in SaaS CRM and mobile CRM remains strong, and the company is planning to exploit this growth opportunity through some expansion.
Salesforce.com has seen potential in the Japanese market, and is now considering expansion in Japan. The company has recently hired former head of Hewlett-Packard (NYSE:HPQ) Japan, Shinichi Koide, as chairman and CEO of Japanese operations. Salesforce.com is expecting to extract $1 billion in yearly revenue from this market. The company's last reported yearly revenue was around $4.07 billion. Therefore, we are looking at an increase of around 25% solely from Japan, if the company achieves its target.
Salesforce.com has a strong position in the CRM market, and the company is the second-largest in terms of revenue growth. But there is another reason why Salesforce.com should be preferred over its competitors. Most of its competitors are diversified groups of businesses, and although it is a good thing in risk mitigation, the diversified approach can sometimes result in slower growth. If we look at Microsoft, the CRM segment is a small portion of its total revenues, and high growth in this segment will not have a big impact on its total revenues.
On the other hand, a focused approach towards a certain high-growth segment usually results in higher growth in revenues. Salesforce.com primarily relies on CRM, and rapid growth in the mobile CRM segment will allow the company to continue growing its revenue at an impressive rate. Higher growth in the business and revenues should result in a larger increase in stock price for Salesforce.com compared to its competitors.
At the same time, increased exposure to a single segment can result in slower growth for the company if the said segment faces declining growth rates. However, as the expected growth in the CRM segment is expected to remain strong in the short-medium term, the company should not face the problem of slowing growth. Nonetheless, in the longer term, Salesforce.com will have to diversify its revenue mix and expand into other business segments. SaaS-based CRM is easy to adopt because of its lower cost. But it also allows the customers to easily switch between different SaaS vendors without incurring huge capital expenditure or long disruptions in their operations. Keeping this in mind, the company will need to be the best service provider in the segment in order to maintain or grow its position.
We believe that Salesforce.com is uniquely positioned to benefit from the growing tablet-based CMOs market, which has strong growth rates. The steps taken by the company should allow it to continue its impressive revenue growth. The stock is down about 8% during the last three months, and it gives a good entry point to the long-term investors. We believe there is still room for Salesforce.com to grow.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.