Is In The Money

Mar. 23, 2019 9:46 AM ETSalesforce, Inc. (CRM)17 Comments21 Likes
Douglas Adams profile picture
Douglas Adams


  • continues to put up stellar growth numbers, underscoring investor demand for risk assets in the current market under the Fed's current patient monetary regime.
  • Friday's market stumble on global economic weakness and an inverted yield curve at the 3-month and 10-year level clearly spooked investors but will likely be a temporary market aberration.
  • CRM has a strong contractual structure that sports a 20% compounded annualized growth rate over the past five-year period that is more than likely to continue moving forward.
  • Expect a 20% premium on Friday's close for the current year.

After putting up a solid 47% YTD market performance through the end of the 3rd quarter of 2018,'s (NYSE:CRM) (red-green bars) upward trajectory was artificially cut short. By mid-November, CRM had given up 23 percentage points of gain on the year. Reversing course for the third time during the quarter, CRM piled on an additional 31 percentage points of gain to end an otherwise hardscrabble year just shy of $136/share, up just over 25% on the year. By contrast, the S&P 500 (black dotted line) was under 9% in its second down year since the Great Recession of 2007 (see Figure 1, below).

CRM’s fortunes remained favorably tuned in the new year, posting almost 18% on the year through Friday’s market close, on the heels of the Fed’s embrace of monetary patience that so favorably colors the market’s perception of risk assets. The S&P 500 has posted almost an equally stellar start to the year, up almost 13% over the same period. The market stumbled badly Friday on fears of weakening global growth which saw German industrial output unexpectedly drop 0.8% MOM in January, sending German Bund yields back below zero. Here in the US, the yield on the 3-month Treasury note finished the day at 2.245% while the yield on the 10-year Treasury note fell to 2.441% in heavy trading, inverting the yield curve for the first time since September 2007. While the possibility of a US recession remains remote in the eyes of most, investors took note and were clearly spooked throughout the trading day. The 2-10 spread narrowed to 11 basis points. All that said, CRM remains poised to add another 20% to its current market share price, finishing the year at $195/share.

Figure 1: and the S&P 500

CRM operates through four basic subscription revenue streams. Typically, these subscription services run for 12 to 36 months. Subscribing customers are under no obligation to renew after the end of the period, yet with revenue streams growing at an annualized rate of just under 20%, clients appear to be finding value with the service provided over the period. Subscription service integration appears to be growing at an even faster pace, hovering about 30% YOY, a good sign for forward growth. CRM expects about $16 billion in revenue this year and $26 billion to $28 billion by fiscal 2023.

The company’s sales cloud platform allows subscribing clients to store sales data, monitor and generate leads, forecast business opportunities, as well as deliver quotes, contracts and invoices. Sales cloud has traditionally been the biggest revenue generating segment of the CRM platform at 33% through the fiscal year ending this past January. Over the past five-year period, sales cloud subscription contracts have grown at a compounded annualized rate of growth of just under 11%.

At 29% of total revenues, the service cloud connects subscribing clients to sales agents in real time via myriad channels, including phone, video, email and messaging, web portals, social networks and online communities and proprietary mobile apps. Logistical links and inventory control and distribution control the flow of goods from sales units to end users. The segment’s five-year compounded annualized growth rates is just north of 22%

The Salesforce platform comprises about 23% of total revenues and is also the fastest growing segment over the period at an annualized rate of just over 31%. The platform allows developers and corporate users to integrate and manage business specific apps that further enhance the customer’s proprietary cloud experience. In May 2018, CRM incorporated MuleSoft to the program mix, which allows subscribing clients to connect to any system, application or device either cloud- or land-based on the unified platform using existing networks rather than custom code. Of the $2.9 billion revenue stream of the Salesforce platform, MuleSoft contributed just about $360 million through FY2019.

The marketing and commerce cloud platform is the second fastest annualized growing segment over the period at 30%, comprising just over 15% of total revenues. The marketing cloud optimizes the one-on-one marketing effort between client and customer across electronic media while retaining the ability to target specific clientele and sell across markets to generate desired scale and customer loyalty.

Profit as a percent of total revenues came in at 74% through FY 2019 that just ended this past January. Total revenues have been growing at a compounded annualized rate of 19.70% over the five-year period. Profits have largely kept pace at 19.21% annualized growth rate for the period. The annualized cost of revenues for the period came in at just under 22%. Research and development spending remain steady at 20% of operation spending. Meanwhile, diluted EPS soared just short of 192% to $1.43/share as tax savings piled high on the company’s balance sheet thanks to the Tax Cut and Jobs Act (2017).

CRM continues to put up strong growth numbers over which quibbling remains very difficult. A 20% growth differential through the end of the year added to its current share price appears very realistic.

This article was written by

Douglas Adams profile picture
Douglas Adams specializes in macro-economic research and turning theory into practical portfolio applications for clients over the past seventeen years. Mr. Adams recently formed Charybdis Investments International based in High Falls, New York where he is the managing director of a fee-only investment advisory practice with clients throughout the United States. As an author, Mr. Adams has commented widely on a diverse array of topics from Brexit to monetary policy to forex to labor productivity and wage growth. He holds an undergraduate degree from the University of California, a master’s degree from the University of Washington and an MBA in finance from Syracuse University.

Disclosure: I am/we are long CRM. 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.

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