Salesforce.com (NYSE:CRM) continues to build its lead. A recent acquisition of a marketing data company only enhances this dominance. Naturally, investors like what they see. They continue to bid Salesforce stock higher as a result.
However, this rising stock price has taken the company’s earnings multiple to high levels. Although Salesforce has become a leading company in the tech industry, the Salesforce price has likely moved ahead of the company’s value.
Salesforce Leads in SaaS
As pioneers of the Software as a service (SaaS) industry, Salesforce has enjoyed years of growth since an executive from Oracle (NASDAQ:ORCL) founded the company in 1999. Salesforce was ahead of its time then.
The tech industry greeted what is now called the cloud with a high degree of skepticism at first. Building trust in the concept took a few years. However, over the last few years, the tech industry has embraced the cloud with open arms.
Today, Salesforce’s customer relationship management (CRM) system has grown to lead the industry. I mentioned in a previous article that Salesforce would become one of the largest companies in all of tech.
This prediction continues to come true as the company stands out above peers such as Oracle, SAP (NYSE:SAP), and Microsoft (NASDAQ:MSFT) in its niche.
The latest company purchase bolsters Salesforce’s lead. Salesforce recently announced the acquisition of Datorama. Datorama will enhance the AI-based market intelligence abilities of the company. It will also help reinforce the relationship between Salesforce and many of the world’s largest companies.
Many companies have accumulated a treasure trove of marketing data. Datorama has worked with over 3,000 agencies and brands to help companies to manage this data.
With Datorama’s help, many of these firms have gained the ability to optimize marketing campaigns that did not exist before. Enhancing these abilities should reinforce Salesforce’s CRM leadership.
Salesforce Stock Is Overvalued
This leadership continues to show up in revenue growth. Revenues have increased by an average of 28% per year over the last five years. Also, after sustaining years of losses, the stock has finally become profitable, and its profit growth rates should slightly exceed revenue.
Wall Street predicts the company will earn $2.32 per share in non-GAAP earnings this year. They also expect profit growth to average about 29% per year over the next five years.
Regarding valuation, Salesforce stock may have moved a bit ahead of itself. The $2.32 per share profit predicted places the forward price-to-earnings (PE) ratio at just below 64. While that hardly rises to levels seen in other tech companies, it indicates the Salesforce price has surged ahead of its impressive growth rate.
I will concede that I have missed gains in stocks such as Amazon (NASDAQ:AMZN) or Netflix (NASDAQ:NFLX) due to my feelings about higher PE ratios. However, only human psychology drives gains at these multiples.
Making money over the long haul remains difficult under such conditions. While CRM stock could see an Amazon-like PE, investors are almost always better off buying at lower multiples.
The Bottom Line on Salesforce Stock
Salesforce should continue to build its dominance in the CRM industry, but that does not mean investors should load up on Salesforce stock. Salesforce has evolved from a concept created by an Oracle executive to one of the leading companies in the American tech industry. Its CRM software, by which it defines the symbol of CRM stock, has gone to lead the SaaS industry.
The company should enjoy a bright future. Revenue and profits continue to see tremendous growth. However, a forward PE of about 64 indicates that the price has moved ahead of the company’s value. I would encourage investors to buy this company if the valuation falls.
However, at this PE, buyers should place Salesforce on their watchlists, not in their portfolios.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
