The latest quarterly results from Salesforce.com (NYSE:CRM) came with a “but” and that’s got Salesforce stock headed in the wrong direction.
Salesforce’s Q4 2019 results included 26% and 88% growth in revenue and profits respectively, not to mention it beat analyst earnings estimates by 15 cents a share. Yet, it appears the fact Salesforce’s Q1 2020 guidance was a little less than analyst expectations — three cents shy on the bottom line and $30 million on the top line — and investors are focusing on the weaker forecast.
If you own Salesforce stock or are thinking about buying CRM, I wouldn’t be too concerned about the weak guidance. Here’s why.
Business Is Good for Salesforce
In fiscal 2019, Salesforce’s revenue was $13.3 billion, 26% higher than a year earlier. On the bottom line, on an adjusted non-GAAP basis, it made $2.1 billion in fiscal 2019, an 88% increase over the previous year.
So, 26% revenue growth and an 88% increase in profits, and investors aren’t happy?
Assuming that Salesforce comes in at the low-end of its fiscal 2020 guidance of $2.74 a share in earnings on a non-GAAP basis, and $15.95 billion in revenue, it will grow the top line by 20% with flat earnings.
Is that really so bad?
Five years ago (fiscal 2015), Salesforce’s non-GAAP EPS was $0.52 a share. That’s annualized growth of just under 40%. And let’s not forget that the 52 cents a share were based on 647 million shares outstanding. The $2.74 a share number will be based on 786 million shares, likely more.
So, in fiscal 2020, Salesforce will generate almost $2.3 billion in non-GAAP earnings, seven times what it earned in 2015.
That’s welcome growth in my book.
Investing in Salesforce’s Business
In the fourth quarter, Salesforce’s operating expenses on a non-GAAP basis increased by 29% to $2.17 billion. For the entire year, they rose by 26% to $7.9 billion or 59% of its revenue. While some might view the fact that the company’s operating expenses are rising as fast or faster than sales as a troubling sign.
Perhaps profits have plateaued, and it’s downhill from here?
I don’t think so.
The company’s billings in Q4 were $6.8 billion, 22% above a year ago, and 5.6% above analyst expectations. Also, Salesforce’s backlog excluding its MuleSoft acquisition was up 23% in the quarter to $25.7 billion. With every segment of its business growing in recent quarters, it makes sense to continue to spend on operations.
The Bottom Line on Salesforce Stock
In November, I argued that Salesforce is a good stock to buy if you’re a believer in the power of the cloud. Essentially, I stated that the company’s free cash flow would continue to grow, pushing the company from a momentum growth stock to becoming growth at a reasonable price.
I still feel that way despite the conservative guidance for 2020.
That’s because Salesforce generated $2.8 billion in free cash flow in 2019, 27% higher than a year earlier. It expects to grow operating cash flow by at least 20% in 2020. In addition, Salesforce has increased its free cash flow for eight consecutive years with most of those years up by at least 20% or more.
Yes, by the typical financial metrics, Salesforce could be considered overvalued, and if you opt to pass on its stock because of this, more power to you for sticking to your convictions.
However, I like companies that generate significant free cash flow. I really like companies that consistently grow free cash flow. Eight years on, Salesforce is on a roll.
Buy Salesforce stock on weakness.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
