Love him or hate him, Jim Cramer’s Mad Money show is entertaining. Recently, Cramer called Salesforce (NYSE:CRM) stock one of the five best S&P 500 tech stocks to own out of 75 choices.
“Once this meltdown comes to an end, Salesforce will still be a terrific company with incredibly strong numbers,” Cramer said in October. “The cloud remains one of the most exciting software stories around and Salesforce practically invented it.”
The TV host went on to suggest that CRM stock tends to rebound nicely after it undergoes a correction. CRM reached a 52-week high of $161.19 in late September; since then, it’s fallen about 12%.
Therefore, at least if Cramer’s theory is correct, CRM stock could be ready to rebound soon.
How Does CRM Compare to the Big Cloud Players?
The five biggest cloud providers as of the end of September, according to Synergy Research Group, were Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), IBM (NYSE:IBM), Alphabet’s (NASDAQ:GOOGL), and Alibaba (NYSE:BABA).
Salesforce, along with nine other names, rounded out the top 15. Over the past four quarters, Microsoft has gained the most market share among cloud players with a 2.5% increase, followed by Amazon, Google, and Alibaba, who’ve each gained 1%; the next ten cloud providers, including Salesforce, lost 1% of market share, while the rest of the group lost 4%.
InvestorPlace contributor Bret Kenwell likes Salesforce stock because the cloud industry is still very much in its infancy, giving the company lots of opportunities to grow.
“Secular trends will continue to power Salesforce stock higher and justify the valuation and until we’re in a recession or bear market, Salesforce will likely trend higher,” Kenwell wrote in a column published on October 22.
“Lastly, while it’s expensive, Salesforce stock is actually cheaper than most of its peers in the cloud, despite having some of the best-looking fundamentals on the cloud block,” he added.
Free Cash Flow Is King
What caught my eye in Kenwell’s column was his mention of free cash flow acceleration. That’s something I pay attention to because capital allocation decisions are influenced by free cash flow.
For the 12 months that ended in July, CRM had FCF of $2.56 billion after accounting for $541 million in capital expenditures.
Salesforce has grown its FCF by 344% over the last five years. That’s a very robust growth rate. Salesforce’s current FCF yield is about 2.4%.
That doesn’t seem like much, since value investors tend to look for a minimum yield of 8%. But it‘s important to consider how quickly Salesforce’s free cash flow is increasing.
By comparison, Microsoft’s FCF yield is 4.1, and over the past five years, Microsoft’s FCF has increased 30%. That means that Microsoft’s free cash flow has grown one-tenth as quickly as that of Salesforce.
Is CRM Stock the Cloud Company to Own?
While I like Microsoft stock and all of the other big players in the cloud, Salesforce’s business seems to be starting to hit its stride.
CRM stock’s total 2018 return through Nov. 7 is 39%. On an annualized basis over the past five years, owners of CRM stock have gained 21%.
Although CRM stock is hotter than a pistol, I believe that the growing prominence of CRM’s software in the enterprise market, along with the company’s rapidly increasing free cash flow, will cause its FCF yield to rise meaningfully in the next few years. As a result, CRM stock will change from a momentum name to a growth at a reasonable price stock.
So yes, Salesforce stock should be on your buy list.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
