Salesforce Stock Is Overvalued Despite Posting Revenue Growth

Salesforce (NYSE:CRM) continues to tread water. Shares of Salesforce stock have traded around $150/share for most of the year.

Salesforce Stock Is Overvalued Despite Posting Revenue Growth

Source: Bjorn Bakstad /

As InvestorPlace’s Luke Lango put it earlier this month, the company is “stuck in neutral.”

If there’s any stock to play the “move to the cloud” trend, CRM stock is just the ticket, but at the current valuation, is the stock a solid opportunity? The company projects 20% growth for the foreseeable future.

With Salesforce holding a commanding share of the CRM market, the company is looking for new frontiers. Recent acquisitions such as Tableau Software moves the company into data visualization. Leveraging their past success into new areas, the company stands to become an enterprise software purveyor on par with competitors like Oracle (NASDAQ:ORCL).

But despite these solid prospects, I believe shares are not a buy at the current CRM stock price. Shares may be an opportunity on a pullback. Let’s take a closer look, and see why skipping Salesforce stock today is the right move.

CRM Stock and a Massive Valuation

It funny to call 20% sales growth “disappointing,” but at the current valuation, the CRM stock price may have gotten ahead of itself. The company estimates sales of between $21 billion and $23 billion by fiscal year ending Jan. 31, 2022. Even at this level of growth, it may be hard for the stock to “grow into its valuation.”

As sales skyrocket, margins likely will improve. Oracle generates $11 billion in net income on $39.53 billion in revenue, or a 28% net income margin. Currently, CRM stock has net margins of 6.2%. Assuming Salesforce can generate net margins of 20% on its FY2022 revenue, the company could generate between $4.2 billion and $4.6 billion in profits. However, based on the current market capitalization ($135.9 billion), this implies a price-to-earnings  (P/E) ratio between 29.5 and 32.2.

Considering Oracle currently trades at a forward P/E of 17.7, this remains a rich valuation. But the company’s 20%+ growth could continue throughout the 2020s. With Salesforce taking a leading role in the “move to the cloud”, the company may have an extensive runway to dominate the market.

However, this presumed ascendance is no slam dunk. Salesforce stock could easily stumble on missed expectations. It’s tough to predict how the winds will blow four or five years out. With this in mind, buying shares at the current valuation looks less attractive.

But an acquisition-based strategy could catapult the CRM stock price to higher levels.

SaaS Rollup and Salesforce Stock

Unlike Salesforce, other emerging SaaS names have yet to become profitable. This may be an unfair comparison, given Salesforce is well above the $10 billion revenue handle. Competitors such as Workday (NASDAQ:WDAY), Splunk (NASDAQ:SPLK), and Slack (NYSE:WORK) are still in the early scaling stages. As a result, they each currently generate negative operating margins.

All three could be acquisition targets for Salesforce. Each focuses on a specific cloud SaaS niche. After the Tableau purchase, moves into other SaaS frontiers are likely to follow. The deals may be pricey, but attractive opportunities could provide fuel to sustain growth throughout the 2020s.

On Salesforce’s August earnings call, the company touted its M&A strategy.

As Salesforce’s CFO Mark Hawkins put it, Salesforce has a “a tremendous history with acquisitions of complementing organic innovation and being able to make progress in that way”.

An M&A-focused strategy can be hit-or-miss. But in the case of Salesforce stock, we have a fast-growing company looking for deals that complement its strategy. Unlike legacy companies like IBM (NYSE:IBM), which is using M&A deals like Red Hat to shore up a declining business, CRM stock could win big if bolt-on acquisitions can complement organic growth.

But despite this potential, the CRM stock price remains rich. Peers like Adobe (NASDAQ:ADBE) and Microsoft (NASDAQ:MSFT) have forward non-GAAP P/Es of  34.6 and 26.8, respectively. Analysts project moderate sales growth for both in the coming year (17.8% for Adobe, 11.3% for Microsoft).

Salesforce stock trades at a forward P/E of 53.8. Analyst consensus calls for 24% sales growth in the coming year. While you are getting high growth, relative to the valuation you are paying a pretty price to ride the wave with CRM stock.

The Bottom Line on Salesforce Stock

The CRM stock price remains high due to the sexiness of “SaaS”. With the pivot to the cloud far from over, Salesforce’s 20% growth projections appears sustainable. But at the current valuation, the stock may be priced for perfection.

So what’s the call? Salesforce stock is definitely not a name to short. The company’s prospects remain solid. But before going long, wait for a more reasonable entry point. In a market correction, CRM stock may be a great opportunity. For now, the stock remains a pass.

As of this writing, Thomas Niel did not hold a position in any of the aforementioned companies.

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