Salesforce Buys Click Software - We Re-Iterate Our Buy On Salesforce

About:, inc. (CRM)
by: Cestrian Capital Research

Salesforce announced the planned acquisition of Click Software for $1.3bn last week.

Click should be a simple tuck-in acquisition for CRM - it brings enterprise customers in key vertical markets and we would expect CRM will be able to improve Click's margins.

CRM's stock price is unmoved given that the market has been weak.

We remain at Buy - Long Term Hold.

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We initiated on Salesforce (CRM) in July in our note here. We observed that the market tends to dislike CRM's large acquisitions and the stock often sits in the doldrums for a while as a result. These were the charts we used to show this. They cover CRM's 2018 acquisition of Mulesoft (MULE) and 2019 acquisition of Tableau (DATA).

Click Software is a much smaller acquisition than MULE or DATA. It's a $1.3bn acquisition of a private equity-backed field service management software business that sells into the major enterprise verticals such as utilities, communications, healthcare and so on. Being a private US / Israeli company, financials aren't published. But we would expect 2019 revenues of somewhere between $130-260m based on the acquisition price - that would mean the purchase price was struck in the range 5-10x current year revenue. Salesforce itself has guided to 2019 revenue of around $16-17bn, so Click's revenues won't move the needle all that much. We'd expect that at scale, Click could generate operating margins in the 20-30% range, meaning contribution to CRM of $26m - $78m once the target has been properly integrated, in say a year.

So this acquisition is business as usual and shouldn't take a great deal of management diversion to integrate. Despite which, we think it will continue to act to suppress CRM's stock price.

We remain at Buy - Long Term Hold on CRM. We think the sustained 20-25% revenue growth at this size of company is remarkable, and we see no sign that growth will slow materially.

A word on position size. We're proposing caution on any buys right now. The market is choppy for large, difficult, geopolitical reasons and in truth it could go any way at any day. We think that support-resistance lines in individual stocks can provide a guide to position building. Right now, CRM's stock can't decide whether it wants to head up above the $145/share support/resist line, or down to the $130/share line. At the time of writing, the stock is sat at around $140/share. At that price we're confident to apply the Buy rating but again we say - don't pile in all in one go. Our horizon here is long-term, 3+ year hold - we're not trying to make a quick turn on the stock, we want to build a position at opportune moments and then ride the upside from what we think will be continued sound growth.

Cestrian Capital Research, Inc - 12 August 2019. More Cash In The Cloud Than You Might Think

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.