Salesforce.com, Inc. (NYSE:CRM) has agreed to buy out competitor Mulesoft Inc (NYSE:MULE). This marks the third company purchase by CRM this year. MULE stock rose as much as 24% on the rumors.
While MULE gives CRM stock yet another source of revenue and profit, it marks one of many companies purchased to help Salesforce meet an ambitious growth goal.
Salesforce CEO Marc Benioff has set ambitious goals, setting a revenue target of $20 billion in revenue by 2022, $40 billion by 2028 and $60 billion by 2032. Revenue for the 2018 fiscal year that ended in January came in at $10.5 billion.
Revenues have doubled from fiscal 2015 levels of $5.37 billion. Hence, if growth keeps its historical pace, the goal can be met.
Mulesoft Is the Latest in a Long Line of CRM Acquisitions
To compare, Oracle Corporation (NYSE:ORCL) (where Mr. Benioff once served as an executive) brought in $37.73 billion in 2017. However, with a $91 billion market cap, doubling revenues becomes more difficult.
Still, meeting this goal would make CRM one of the largest software companies in the world.
Mulesoft makes up a small fraction of its plan to improve product offerings and growth. Revenues for MULE came in at a comparatively modest $297 million in 2017. Hence, one has to think this purchase will be one of many in a drive to meet CRM’s aggressive goal. Still, analysts have set consensus revenue projections for fiscal 2019 at $12.66 billion. This placed them on track to get to $20 billion by 2022 even without this specific purchase in mind.
Purchasing high-growth startups has become a common practice for Salesforce. The company just announced its purchase of CloudCraze last week, and Attic Labs in January. Still, Mulesoft would become Salesforce’s largest purchase to date. Still, given the goal, investors should expect more acquisitions at or above this size.
Also, Salesforce has already carved out a successful niche in the competitive cloud-based customer management software. Microsoft Corporation (NASDAQ:MSFT) directly competes with its Dynamics software. MSFT also has found tremendous success in the cloud with its Azure software package. However, it has released its share of less-successful products, and users perceive Dynamics as offering less than the Salesforce alternative.
It’s Not Too Late to Buy Salesforce Stock, But it May Be Too Early
Investors can still profit from CRM stock. However, purchasing this equity will not come cheap. When it registered a price-to-earnings (P/E) ratio at all, the figure had become part of the cloud in a different sense. The current PE stands at a sky-high 732 times earnings. Against forecasted 2019 non-GAAP earnings of $2.05 per share, that P/E falls to about 61.
Tech companies such as Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX) currently maintain much higher P/E ratios. Still, 61 times earnings seems high, even for CRM’s impressive growth story. Even our own James Brumley, a long-term bull on Salesforce stock, feels the equity is overbought at these levels.
Still, CRM’s growth story remains compelling. Its growth targets remain difficult, but not far removed from the growth the company achieved in the past. For investors willing to pay a premium and exercise patience, they could profit handsomely from a stake in Salesforce stock.
Final Thoughts on CRM stock
Salesforce’s acquisition of Mulesoft represents the latest purchase in a plan to improve its offerings and become one of the largest software companies in the world. On the surface, the prospective buy represents the latest in CRM’s long list of acquisitions.
However, this buy becomes CRM’s largest acquisition to date. It also sends a message to the market that CRM’s takeover targets will grow ever larger, just like its revenues. With its high growth and the increasing size of its purchases, CRM stock is destined to become not only one of the largest players in the software industry, but in the high technology sector at large.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
