Whether to buy CRM stock often boils down to how an investor views two fundamental trends. One, rising corporate spending on digital transformation projects. And two, Salesforce.com‘s (CRM) penchant to make big acquisitions, such as Slack Technologies (WORK).
CRM stock has gained over 12% in 2021 after pulling back in November and December. After forming a long cup base from September 2020 to September 2021, Salesforce stock hit an all-time high of 311.75 on Nov. 9.
But software growth stocks have retreated amid an expectation for rising interest rates, which could impact free cash flow. The iShares Expanded Tech-Software Sector ETF was down 5.5% in November.
Salesforce reported Q3 earnings and revenue that topped estimates but guidance disappointed. CRM stock reported earnings that for the first time included a full quarter of financials from Slack Technologies. The deal closed in July.
Salesforce Stock: Co-CEO Structure Returns
Salesforce promoted Bret Taylor to act as co-chief executive alongside current CEO Marc Benioff. Taylor has served as Salesforce’s president and chief operating officer since 2019. Before that, he was chief product officer. Twitter (TWTR) named Taylor its new chairman on Nov. 29.
Salesforce had a co-CEO structure earlier. Keith Block, viewed as a possible successor to Benioff, stepped down as co-CEO in early 2020.
CRM stock sells software under a subscription model. Its software helps businesses organize and handle sales operations and customer relationships. The company has expanded into marketing, e-commerce and data analytics.
Amid the coronavirus pandemic, demand for next-generation collaboration and productivity tools has increased. In addition, many companies aim to automate operations and track key business metrics in order to support employees working from home.
One view is that spending on digital transformation projects will continue to be strong as the Covid-19 emergency eases. Such projects turn paperwork into electronic records and automate business workflows. More companies are investing in business analytics/artificial intelligence tools that scrub customer data.
CRM Stock: Digital Transformation Spending Key
Morgan Stanley analyst Keith Weiss in a report said Salesforce stock is will positioned based on a survey of spending priorities for chief information officers.
“Salesforce’s core portfolio squarely addresses CIO’s top priorities for digital transformation,” Weiss said. “Our survey bolsters confidence in industry growth forecasts as marketing, CRM and customer service ranked highest among priorities. Meanwhile, we see momentum building in the market addressed by Slack as businesses implement tools to better collaborate and improve productivity while working remote in the ‘new normal’ post Covid.”
At an investor day in December 2020, Salesforce said it aims to double revenue to $50 billion by 2026, including a $4 billion contribution from Slack. At the same time, Salesforce stock lowered its organic revenue growth target to 19% from 20% over the next four years.
Salesforce Stock Joins Dow Jones Industrial Average
CRM stock in 2020 was added to the Dow Jones Industrial Average. Further, Salesforce stock replaced Exxon Mobil (XOM) in the 30-stock benchmark.
Meanwhile, CRM stock recently was added to the IBD Long Term Leaders list.
Also, the bar keeps rising when investors look at Salesforce’s “biggest acquisition ever.” Its purchase of Exact Target in 2013 was followed by e-commerce platform Demandware in 2016, and MuleSoft in 2018. Then Salesforce ponied up $15.7 billion in an all-stock deal to buy data analytics firm Tableau Software last year.
Then came the Slack deal. Amid growing competition with Microsoft (MSFT), Salesforce agreed to pay $27.7 billion for workplace collaboration software maker.
The upbeat view is that acquisitions have enabled Salesforce to expand from its roots in customer relationship management software into marketing, e-commerce and other markets.
Salesforce is one of many big-cap tech stocks to watch. Started in 1999, Salesforce went public in 2004. Salesforce founder and Co-Chief Executive Marc Benioff worked at Oracle for 13 years before he left to start the software company.
CRM Stock: Core Business Strength An Issue
Microsoft’s Dynamics has gained traction as a lower-priced alternative to Salesforce tools, some analysts say. In addition, Microsoft is putting more salespeople behind the Dynamics business.
Also, Salesforce has been a fierce rival of Oracle (ORCL). Competition with Adobe Systems (ADBE), the digital media and marketing software firm, has been rising.
Newer rivals include Zendesk (ZEN) and HubSpot (HUBS). And, Twilio (TWLO) has jumped into customer relationship management with an acquisition.
The customers of software-as-a-service, or SaaS, companies like Salesforce purchase renewable subscriptions, rather than one-time software licenses. Customers receive automatic software updates via the web.
Also, the company spends about 14% of revenue on research and development, relatively high for a software company. Increased hiring and wage inflation for software engineers also have been a headwind to margin growth.
At an analyst day on Sept. 23, Salesforce raised its fiscal 2022 revenue outlook and forecast fiscal 2023 revenue slightly above expectations.
For fiscal 2022, which ends in December, Salesforce said it expects revenue in a range of $26.25 billion to $26.35 billion. Its earlier guidance was $26 billion at the high end.
Salesforce Stock: Fundamental Analysis
Salesforce said it expects fiscal 2023 revenue in a range of $31.65 billion to $31.80 billion vs. estimates of $31.52 billion. In addition, Chief Financial Officer Amy Weaver committed to higher margins.
Salesforce Q3 earnings fell 27% to $1.27 on an adjusted basis, including the Slack acquisition. Revenue climbed 27% to $6.86 billion, including Slack.
Analysts expected Salesforce to report earnings of 92 cents a share on sales of $6.8 billion.
The enterprise software maker said current remaining performance obligations, or CRPO bookings, rose 23% to $18.8 billion. That edged by analyst estimates of $18.71 billion.
Meanwhile, CRPO bookings are an aggregate of deferred revenue and order backlog. The Salesforce CRPO growth included acquisitions.
For the current quarter ending in January, Salesforce’s revenue outlook met expectations. The software maker expects revenue in a range of $7.224 to $7.234 billion vs. estimates of $7.23 billion.
But the company forecast earnings in a range of 72 cents to 73 cents a share, missing estimates. Analysts had projected a profit of 82 cents a share.
In addition, Salesforce projected CRPO growth of 19% in the January quarter, below estimates of 21% growth. Management said business has slowed at its MuleSoft unit, acquired in 2018.
Salesforce Builds Artificial Intelligence Platform
One technology that Salesforce hopes will drive more revenue is artificial intelligence. The enterprise software maker introduced its “Einstein” AI software cloud platform in September 2016. The first Einstein AI software tools helped salespeople predict which deals are most likely to close based on a company’s historical lead and account data.
In addition, Salesforce has integrated AI tools into other enterprise software offerings over the past three years, targeting industries such as financial services in digital transformation. Einstein AI primarily works via chat bots.
Salesforce in 2019 agreed to buy data analytics firm Tableau for $15.7 billion in an all-stock deal. Tableau provides data visualization software. In addition, it enables customers to build databases, graphs and maps using time series analytics, a technique that analyzes a series of data points ordered in time.
Also, Salesforce expects synergy between its Einstein artificial intelligence tools and Tableau’s business intelligence software. In early October, Salesforce announced that it would rebrand Einstein Analytics as Tableau CRM.
CRM Stock: Recent Acquisitions
In 2018, Salesforce bought MuleSoft for $6.5 billion in cash and stock. MuleSoft’s software automates the integration of new tools with legacy enterprise platforms and speeds application development.
Meanwhile, Salesforce spent $4.6 billion on acquisitions in 2016. They included e-commerce platform Demandware.
E-commerce has boomed amid the coronavirus pandemic. The shift to online shopping has provided a lift to Salesforce’s “Commerce Cloud,” which has its roots in the Demandware purchase.
Furthermore, Salesforce’s $2.5 billion purchase of Exact Target in 2013 jump-started its move into marketing software.
Bullish analysts say Salesforce AI’s tools, plus Tableau, plus MuleSoft will make a powerful combination for digital transformation projects.
Further, Salesforce aims to partner with IT services firms such as Accenture (ACN) to add customers. Despite U.S.-China trade tensions, Salesforce in July added Alibaba Group (BABA) as a sales channel partner in China.
Is Salesforce Stock A Buy?
In cloud computing, Salesforce has partnered with Google for data analytics. In addition, Salesforce has expanded its venture capital investing.
According to IBD Stock Checkup, CRM stock currently has a Relative Strength Rating of 65 out of a possible 99. The best stocks tend to have ratings of 80 and above.
CRM stock holds an IBD Composite Rating of 71 out of a best possible 99.
IBD’s Composite Rating combines five separate proprietary ratings into one easy-to-use rating. The best growth stocks have a Composite Rating of 90 or better.
In addition, CRM stock has an Accumulation/Distribution Rating of D. The rating analyzes price and volume changes in a stock over the past 13 weeks of trading. The rating, on an A+ to E scale, measures institutional buying and selling in a stock. A+ signifies heavy institutional buying; E means heavy selling. Think of the C grade as neutral.
CRM stock fell below its 50-day moving average after the Q3 earnings report, a bearish signal. Software growth stocks remain under pressure, with Adobe’s outlook missing expectations.
As of Dec. 22, CRM stock trades below a cup-and-handle entry point of 284.60, according to IBD MarketSmith analysis. It likely needs to form a new base to be actionable.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on artificial intelligence, cybersecurity and 5G wireless.
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