Cloud giant Salesforce.com, Inc.(NASDAQ:CRM) just reported a robust double-beat-and-raise quarter underscored the company’s strengthening secular growth narrative. Indeed, it was the company’s largest earnings and revenue beats in several years.
And yet, CRM stock is up just 2% in response to those really good numbers. When a stock hardly moves on really good news, especially against the backdrop of an up market, it is usually a sign of a maxed out valuation.
I think that is the case when it comes to CRM stock. This is a long-term winner positioned for huge operational growth over the next several years as big data, AI, and cloud services demand grows. But in the near-term, CRM stock seems more than fully valued for all that big growth.
As such, CRM looks like a case of long-term upside, near-term maxed out to me.
Here’s a deeper look:
Salesforce.com Is a Long-Term Winner
Salesforce is truly at the heart of the cloud and data revolutions.
CRM leverages data and analytics to deliver robust cloud solutions to enterprises that want data-driven insights on their customers. The volume of data globally is exploding higher right now, thanks to the mainstream emergence of the Internet of Things (IoT) and a movement among large companies towards big data accumulation and analysis. Moreover, every company around the world is going digital, and that means they are pivoting towards the cloud.
Consequently, CRM finds itself in the overlap of two huge secular growth narratives.
Granted, there are a lot of competitors in this space, but none that come close to rivaling CRM. Despite rising competitive threats and tougher laps, revenue growth at Salesforce has hardly slowed over the past several years. Back in 2014, revenues grew by 33%. In fiscal 2018, revenues grew by 25%. Last quarter, they rose by 25%. And this year, revenues are expected to rise by 25%.
Clearly, CRM is simply pushing aside competition and growing alongside the secular growth cloud and data markets.
CRM’s growth narrative has two huge catalysts over the next several years: Mulesoft and AI. The company just acquired hybrid cloud player Mulesoft, and that gives the company a robust growth pipeline in the ultra-popular and big-growth hybrid cloud market. Moreover, CRM’s AI solution, Salesforce Einstein (which already makes 2 billion predictions a day), will only further differentiate CRM from the competition.
All together, this is a big growth story positioned for big growth over the next 5-10 years.
Big Growth Is Priced In
Unfortunately, at current levels, it looks like all that big growth is already priced in.
Owing to the company’s big-growth nature, this company won’t be done growing in five years. Instead, this is more like a 10-year growth story.
During that 10-year growth stretch, I wouldn’t be surprised to see revenue growth run around 15% per year, representing a moderate slow-down from today’s 25% growth rates (22% ex currency changes).
CRM’s subscription revenue model is set up so that as revenue growth decelerates, margins ramp up. Consequently, as revenue growth slows from 20%-25% to 15% and lower over the next 10 years, margins should ramp higher. Operating margins presently hover around 15%. Assuming roughly 200 basis points of expansion per year (consistent with historical standards), operating margins should be able to reach 35% in 10 years.
Under these assumptions of 15% revenue growth and 35% operating margins in 10 years, I think CRM can net about $13.70 in earnings per share in 10 years, versus $2.30 this year. A market-average growth multiple of 20-times forward earnings on that $13.70 implies a nine-year forward price target of $274. Discounted back by 10% per year, that equates to a present-day value of around $115.
Bottom Line on CRM Stock
CRM stock is supported by powerful long-term growth fundamentals. But at $130, all that growth seems more than fully baked into the valuation. As such, near-term trade on CRM stock may be choppy.
Longer-term, though, CRM stock will be a winner.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
