Shows No Signs Of Slowing Down

About:, inc. (CRM)
by: D.M. Martins Research
Summary delivered its 13th consecutive all-round beat, with impressive margin expansion helping to boost the bottom line.

Very importantly, the company's growth has been paced and largely predictable, a key tenet in my storm-resistant growth investment thesis.

Although valuation multiples continue to be rich, I believe CRM is worth owning at current levels due to best-in-class fundamentals. (CRM) continues to provide investors with good reasons to remain bullish.

The San Francisco-based cloud company reported fiscal 1Q20 results that looked pristine across the board. The $50 million top-line beat may have seemed small at first glance. But given the predictable recurring revenue model, the performance can be considered impressive. Adjusted EPS of $0.93, on the other hand, clearly left consensus of $0.61 in the dust.

Credit: Rolling Stone

Salesforce's clouds continued to expand at a healthy pace (see six-month revenue growth trend below, on the right), albeit at a decelerating pace that is expected as the company continues to gain scale. Marketing and platform, now accounting for nearly 40% of total revenues (vs. only one-third this time last year), continue to fill in the growth gap left by the maturing of the market-leading sales and service clouds. Once again this quarter, I estimate that much of the company's growth momentum has been fueled by acquisitions, including MuleSoft and the smaller Datorama and Rebel.

Source: DM Martins Research, using data from company reports

Likely the result of operating leverage, profitability increased noticeably this time. Gross margin expanded YOY by about 140 bps, levels that I don't recall having seen in recent quarters. Opex increased at a faster pace than revenues, which seems largely in line with the company's need to integrate the recent acquisitions and continue to invest in top-line expansion.

With revenue growth up in the mid-20s, op margin climbing an encouraging 120 bps and full-year EPS guidance receiving a 14-cent bump at the mid-point of the range, I believe Salesforce's longer-term financial targets remain well on track of being achieved, if not exceeded. See summarized P&L below.

Source: DM Martins Research, using data from earnings release

On the stock

CRM has been one of the market-beating names in my All-Equities SRG portfolio since mid-2018. The main reasons convincing me to buy shares nearly one year ago have remained intact. The company is executing very well amid favorable trends in business data management (i.e., digital transformation and cloud transition). But very importantly, the company's growth has been paced and largely predictable, a key tenet in my storm-resistant growth investment thesis.

Chart Data by YCharts

Certainly, CRM continues to look pricey. Current-year P/E is likely to approach 60x on Wednesday, levels that are far from comfortable for most investors (certainly value-biased ones, which I once considered myself to be). But I believe the multiples to be justified, given a number of factors: (1) expected long-term earnings growth rate of 25% that looks compelling, (2) spotless, net cash-rich balance sheet, and (3) a recurring revenue model that is likely to not only grow over time, but remain relatively stable even through less-than-ideal macro environments.

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.