Salesforce.com Has High Growth Potential: Initiating A $58 Price Target

Aug.27.14 | About: Salesforce.com, Inc. (CRM)

Summary

Salesforce1 offering may drive significant sales growth going forward.

Acquisitions, growth in core business, and global expansion drives the high valuation.

I'm initiating a $58.09 price target on the company (extremely conservative).

While much has been said about Salesforce.com's (NYSE:CRM) competitive position in relation to Microsoft (NASDAQ:MSFT), I think that those concerns are already built into the valuation. Going forward, I have high conviction that the company will continue to execute in new areas, which will drive the company's valuations going forward. Also, Salesforce.com has made strategic acquisitions like ExactTarget, and RelateIQ, which adds to Salesforce.com's core ecosystem of services and software. A stronger ecosystem will drive more sales through cross-sale opportunities.

Salesforce.com finds itself in the envious position of being in a rapid growth phase, and while the business could be much more profitable, I think the investments that are being made now are reasonable in light of future pay-offs. I think the stock trades at a fair value currently, but I think bottom line and top line growth will take the value of the stock much higher over the next five years.

Cloud will drive Salesforce.com's growth

Salesforce.com has a different approach to the cloud, and with the core enterprise software, Salesforce.com is one of the better CRM tools that an enterprise can deploy to manage sales relationships. Salesforce.com has pivoted into becoming a dominant PaaS provider (platform as a service) via its offering called Salesforce1.

For those unfamiliar to PaaS, here's a definition from Apprenda:

Cloud platform services, or Platform as a Service (PAAS), are used for applications, and other development, while providing cloud components to software. What developers gain with PaaS is a framework they can build upon to develop or customize applications. PaaS makes the development, testing, and deployment of applications quick, simple, and cost-effective. With this technology, enterprise operations, or a third-party provider, can manage OSes, virtualization, servers, storage, networking, and the PaaS software itself.

Salesforce1 basically streamlines the process of building an application that can be accessed by offering the necessary software, and tools to do it, and even the infrastructure (mainframe PCs). This added level of service gives Salesforce.com added margin versus just offering infrastructure. Salesforce.com has been able to gain various customer wins, as Salesforce1 makes it considerably easier for organizations to create software that's unique to their needs and can be accessed via a mobile application or via the Internet.

According to Marc Benioff:

We also closed another deal with Safeway. They selected the Salesforce1 platform to build next generation applications that will drive greater productivity across their store operations. Store managers and associates will be able to complete all their tasks right from their mobile phones, very, very exciting and leveraging Salesforce communities, Safeway will bring all their stores and associates into a single communications platform, again a very, very powerful story that we're very, very excited about.

Salesforce.com is an enabler to productivity as it gives companies the tools and infrastructure needed to drive productivity in the workplace. By broadening the market through tools and back-end infrastructure, Salesforce.com has been able to pivot from its dependency on selling its own productivity software and instead become a software development and infrastructure provider. This part of the market is expected to grow at a fairly high rate and the business has great exposure to it.

Click to enlarge

Source: Salesforce.com

The company doesn't offer any comps to prior periods and the prior earnings release didn't break down the segment revenue. However, the Salesforce1 platform comprises a respectable mix of total revenue (15 percent). This segment offers a lot of growth potential and, assuming the company continues to build the front-end experience paired with continued back-end infrastructure investment, Salesforce1 will eventually become Salesforce.com's largest business segment in terms of revenue.

Quoted from Reuters:

In a newly released study, International Data Corporation forecasts that the worldwide public platform-as-a-service market is expected to grow to over $14 billion in 2017. The opportunities for monetizing public PaaS functionality are high in light of the advances being made in social, mobile, and real-time contextual activities.

Bottom line

Salesforce.com is definitely one of the more speculative plays in the cloud. On the bright side, the company continues to exhibit high growth rates, and acquisitions offer meaningful value.

I price the stock at 111.72 times non-GAAP 2015 fiscal year EPS of $.52. My price target is currently $58.09; the present valuation of the stock is $59.23. The stock trades at a value higher than my current price target, but the five-year growth trajectory is still compelling, as the company will continue to grow sales and will eventually adjust its cost structure to reflect higher margins, which will drive earnings. Assuming the company reports respectable free cash flow at some point in the next five years, the company will eventually return cash to shareholders via share buybacks and dividends.

Therefore, the business is a long-term buy, even though stock price appreciation may be limited over the next several months.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.