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Should You Buy CRM Stock? 3 Pros, 3 Cons

CRM stock looks like a solid long-term bet, but be wary of it's high valuation

By Laura Hoy, InvestorPlace Contributor

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The Story of Salesforce.com (CRM) Stock Sounds Awfully Familiar

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No matter how you slice it, data is what makes the world go round these days. From the Internet of Things to artificial intelligence and machine learning, everyone is looking for ways to pull, process, store and share data. For that reason, it’s important to beef up your portfolio with a few big data stocks to ensure that you can capitalize on this trend, and there’s no purer data play than salesforce.com (NYSE:CRM).

CRM stock has had a booming year with its share price rocketing from $90 per share to more than $140 — and for good reason. The company’s software-as-a service model has been crushing its targets and leaving analysts hungry for more. However, with CRM stock currently trading at all-time highs, investors might be wondering whether now is the right time to take a position.

Here’s a look at the pros and cons of buying CRM stock now.

Pro: Big Expectations

Salesforce stock’s rally has been based on the company’s success, which is good news for cautious investors. Over the past 4 years, CRM has been able to produce revenue growth of more than 20% and this year isn’t likely to be any different. Most are expecting to see the company’s revenue rise 25%. That’s impressive considering how competitive the cloud computing space has gotten over the past five years. 

Revenue growth at that level looks doable for Salesforce over the next few years as well. Because data needs are rising so quickly, most are expecting market leaders like CRM to continue growing their revenue as the industry continues to grow.

Con: Playing Catch-up

While CRM has been a cloud computing leader for years, there is some concern that the firm can’t carry on like this forever. Perhaps Salesforce will be able to rely on its current model to produce impressive revenue growth for another year or two, but then what?

Salesforce’s total addressable market is shrinking as the firm continues to extend its reach, and that should be a scary thought for investors because it means the firm will have to find new ways to support the kind of revenue growth they’ve become accustomed to. 

Over the next few years it will be extremely important for Salesforce to up its cloud computing game in order to offer customers better insight into their data. That’s because collecting and organizing data has become mundane — businesses are starting to seek out more compelling systems that can provide more sophisticated insights through AI and machine learning. That could spell trouble for CRM, because it brings heavy hitters like Alphabet Inc (NASDAQ:GOOGL) and Amazon.com (NASDAQ:AMZN) into the spotlight.

Pro: Eye On The Future

With that said, Salesforce has been working to ensure that its business can keep up with tech giants like Google and Amazon by making strategic acquisitions that will bolster its offerings. Salesforce recently acquired Mulesoft, which allows clients to gather data from a variety of sources and analyze them together. 

Management has made it a priority to offer customers a unique service that covers their needs and the company has historically been at the forefront of cloud computing innovation. So, although the past doesn’t necessarily dictate the future, it’s a good indication that Salesforce execs are constantly looking for ways to position the company for the future.

Con: Security

Another issue for Salesforce is the fact that unlike many competitors, CRM doesn’t actually own all of its data centers. That creates a security risk because Salesforce doesn’t have the same control over its infrastructure that some of its competitors do. On the surface this isn’t a huge problem, but it’s important to note because data security has become a concern for many businesses, especially now that sensitive information is being moved to the cloud.

It’s important for Salesforce to able to reassure customers with privacy and security concerns. And not owning its own facilities could become a negative — especially if the firm ever suffers a security breach.

Pro: Pure SaaS Play

Another advantage to holding Salesforce stock is the fact that it’s one of very few pure software-as-a-service plays. Competitors like Microsoft Corporation (NASDAQ:MSFT) may have the edge when it comes to fields like AI and machine learning, but it’s SaaS revenue is only a small chunk of the company’s overall revenue. 

Salesforce has the benefit of bringing in 100% of its revenue through its subscription services, which tends to be a high-margin business model. Not only that, but CRM has been able to diversify the services it offers over the past few years which should comfort investors who are worried about the quickly changing industry.

Con: Valuation

Perhaps the biggest reason investors might consider avoiding CRM stock right now is the company’s sky-high valuation. With a forward P/E of 61.6, Salesforce is considerably more expensive than competitors like Oracle Corp (NYSE:ORCL), whose forward P/E is just 18.2. While some of CRM’s premium is justified by the firm’s lofty forward guidance and impressive earnings performance, investors should keep in mind that a valuation like that makes it a risky buy.

Any kind of bad news or earnings stumble could wreak havoc on CRM stock simply because the market is expecting great things. 

The Bottom Line for CRM Stock

CRM stock has been performing well over the past year and that momentum looks likely to continue. The company isn’t facing any major potential obstacles which suggests that its run will continue- however, investors should proceed with caution because of CRM’s lofty valuation. It might be wise to wait for a pullback in order to gain a better entry point.

As of this writing, Laura Hoy was long AMZN.


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Article printed from InvestorPlace Media, https://investorplace.com/2018/07/should-you-buy-crm-stock-3-pros-3-cons/.

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