Since my last Salesforce.com (NYSE:CRM) article in May, shares of the customer relationship management company have appreciated close to 19%. In that article, I had written about why the shorts are wrong about Salesforce. The company has been delivering terrific growth in revenue, and since it operates in a fast-growing market, its performance can improve further.
In a little over three months since that article, Salesforce's short float has declined further. At the end of April, Salesforce has 45.14 million shares short according to my previous article, but at the end of May, the short float fell to 43.33 million shares. This is not surprising if we consider Salesforce's performance and its prospects.
Tremendous growth expected
For example, in the second quarter, Salesforce.com announced total revenue of $1.32 billion, a 38% increase on an year-over-year basis. Moreover, for the third quarter of 2015, its revenue is projected to increase 27% on a year-over-year basis, while adjusted earnings are expected to come in between $0.12 and $0.13 per share, up from the year-ago earnings of $0.09 per share. Its projected revenue and earnings for the third quarter are also in line with estimates.
Moreover, Salesforce's long-term prospects are also quite bright. In the course of the next five years, the company's bottom line is projected to grow at an annual rate of 28%, which is almost double of the 15% industry average. In addition, the company's cash flow generation is also impressive, as Salesforce has generated $1.13 billion in operating cash over the past year, apart from $1.09 billion in levered free cash flow.
The end-market opportunity is strong
Additionally, investors should also note that the company is plying its trade in a fast growing CRM space, and it is closing new deals at a fast pace. According to Gartner, the CRM space is on track to become a $36 billion market by 2017. According to a Forbes report:
"The latest enterprise software forecast from Gartner shows Customer Relationship Management increasing to a $36.5B worldwide market by 2017, a significant increase from the $20.6B forecasted in Q1 of this year. CRM also leads all enterprise software categories in projected growth, showing a 15.1% CAGR from 2012 to 2017, also revised up from 9.7% in the Q1 forecast."
Salesforce is doing well to make the most of this opportunity, as its revenue growth shows. The company has made a number of moves to grow its business, especially acquisitions. Last year, Salesforce acquired ExactTarget, and it has successfully integrated it into its portfolio. This acquisition has brought the ExactTarget Marketing Cloud to Salesforce's portfolio, which should allow the company to tap growth in digital marketing.
This is a smart move, as digital marketing is slated to grow at a good pace going forward. As per Forrester, spending on digital marketing is expected to double in five years. In fact, this market will represent around 30% of total marketing spending by 2017.
Further, in response to the rising competition, Salesforce had also acquired social media monitoring company Radian6 Technologies and social media marketer Buddy Media. In July, Salesforce acquired RelateIQ as well for approximately $390 million. This acquisition has added the capability of spontaneously capturing data from calendars, email, and smartphone calls to its portfolio. With such moves, Salesforce has bolstered its product platform, which has allowed it to land more deals.
According to management:
"And of course nothing is more indicative of the value of Salesforce than the level of customer usage on our platforms and I'm thrilled to announce that last month we delivered our first $2 billion transaction day, an incredible milestone for the entire cloud computing industry. More exciting, our service delivered more than 130 billion transaction this quarter, up 52% for a year ago and you saw exact target delivery and even more transactions on top of that."
Services will continue driving growth
Moreover, Forbes has named Salesforce the world's most innovative company for the fourth year in a row. This showcases its persistent focus on the customer, as the company is focused on delivering an innovative customer platform. Moreover, its Sales Cloud has been reported to be the leader in Gartner's Magic Quadrant for Salesforce automation for the eighth year in a row.
In addition, IDC recently declared Service Cloud to be a cutting edge platform for servicing and supporting customers. Salesforce launched Service Cloud SOS in April, which provides quick and tailored customer service within any mobile app, giving customers the ability to manage their business on mobile. In addition, the company's updated Salesforce Journey Builder enables personalized planning and personalized optimization for one-to-one customer interactions across various channels.
The breadth of the Salesforce platform can be seen by its wide enterprise cloud ecosystem. It has more than 1.7 million developers leveraging its development tools on mobile using Salesforce1. Several customers have already turned toward Salesforce1, and its apps have now been installed over 2.5 million times by its enterprise customers.
Recently, Salesforce announced its partnership with Microsoft (NASDAQ:MSFT). Microsoft is expected to have become the largest customer of the Salesforce marketing cloud platform. The software giant has built a new product called Office 365 onto the marketing cloud, and it is using Journey Builder to augment its application.
Moreover, the company recently launched its Salesforce Wear initiative, in line with the shifting trend toward the wearable market. Salesforce is trying to integrate wearables with its enterprise infrastructure, and as this market grows, it should see more traction.
Considering Salesforce's moves and the opportunity in the end market, it is not surprising to see why the shorts are moving away from the stock. The company's bottom line is expected to grow at a tremendous pace in the future, and the consistent addition of features on its platform should allow it to land more customers going forward. Thus, investors should remain invested in Salesforce even after its solid run in the past three months, as the stock looks well-positioned to climb further.
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.