When Marc Benioff co-founed Salesforce.com (NYSE:CRM) nearly 20 years ago, he really did not talk much about Customer Relationship Management (CRM) software. This was actually kind of mundane, as the market was getting mature and Salesforce stock still was a question mark.
Instead, Marc focused his energies on evananglizing a revolutionary approach to business software. It would have a new business model based on subscriptions that would be more aligned with the needs of the customer. Marc also wanted to create a modern interface, similar to that of companies like Amazon (NASDAQ:AMZN), eBay (NASDAQ:EBAY) and Yahoo!
But of course, a key part of the new vision was to leverage the cloud to deliver applications (although, in the early days, there was no such word as “cloud”).
While it took time to get adoption and there were certain points where things looked dire, the fact is that Marc would go on to significantly change the paradigm.
Interestingly enough, as seen with the latest quarter, Salesforce stock continues to grow at a hefty pace, despite is massive scale. Revenues jumped by 25% to $3 billion.
It’s been a great ride for CRM. Consider that the market value is a hefty $103 billion.
CRM Stock and the New Trends
Despite the advantages, I still think there should be some caution with Salesforce stock. First of all, the cloud is going through a transformation. It’s no longer about collecting and organizing data and creating fancy dashboards.
Customers now want more insights, often based on sophisticated systems like deep learning and AI (Artificial Intelligence).
So unlike the situation with CRM in the early days of the cloud, this time around there are many companies chasing these new technologies, such as MSFT, AMZN and Alphabet Inc Class A (NASDAQ:GOOGL, NASDAQ:GOOG). VCs are also pouring huge amounts into startups.
Over time, these companies will certainly leverage AI into core areas that Salesforce.com dominates like salesforce/marketing automation and support.
Besides, customers definitely want alternatives to Salesforce.com. This will not only mean more innovation but also better pricing. So in the coming years, it should not be a surprise that Salesforce.com will see more serious competition.
Bottom Line on Salesforce Stock
Yet I actually think the biggest problem with Salesforce stock is the valuation. During the past 12 months, the shares have jumped by about 60%, putting the price-to-sales ratio 9.4X.
Interestingly enough, I think a big part of this move has been due to Salesforce.com’s own actions! That is, the recent acquisition of MuleSoft, which was struck at a nose-bleed valuation, sparked a rally in the cloud stocks. There has also been a boom in IPOs. Just look at deals like Zuora (NYSE:ZUO), Avalara (NYSE:AVLR) and Docusign (NASDAQ:DOCU).
Even a company like Domo (NASDAQ:DOMO) was able to pull off an IPO. This was the case despite slowing growth and heavy losses. Actually, if DOMO did not have its public offering, the company would have likely had to initiate layoffs.
So all in all, there are signs of frothiness.
I’m not saying the situation is dire for Salesforce stock. Instead, for investors, it might be a good idea to be patient and wait for a better price point.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.