Salesforce (NYSE:CRM) is lagging this year. As of Nov. 1, shares of the cloud computing and enterprise software maker are up 14% year-to-date. That’s well behind the S&P 500, Microsoft (NASDAQ:MSFT) and the First Trust Cloud Computing ETF (NASDAQ:SKYY).
Broadly speaking, software stocks have been hot this year, but the group has recently given back some of those gains amid concerns that valuations have reached untenable levels.
On the surface, CRM stock has the look of being one of those richly valued software names. Value hunters are likely to balk at a price-to-earnings ratio of more than 54x and a price-to-book ratio north of 7x, particularly for a relatively mature technology company. However, you could argue that CRM stock is not yet fairly valued. Shares are up 5.4% over the past month, indicating a credible rally is afoot.
In fact, for all the hullabaloo surrounding newer, less mature software-as-a-service names, Salesforce could prove to be the better way of accessing fast-growing software segments. That’s particularly true for conservative investors. Add to that, CRM’s growth prospects remain compelling. But the market may not be fully appreciating that story at the moment.
“We believe the CRM story embodies the best characteristics of the software sectors,” Jefferies analyst Brent Thill said in a recent note to clients. “We believe the company’s growth profile … is underappreciated by the market.”
Analysts Expect Big Growth
Thill expects the addressable market for the products and services provided by Salesforce will swell to $140 billion by 2022. That’s impressive, but two factors appear to be restraining CRM stock this year. First, there has been a modest rotation out of growth names into value stocks. Second, some investors have bailed on CRM stock amid expectations that corporate IT buyers are reining in spending this year. However, these are boom times for the enterprise software market in which CRM dwells.
“The enterprise software market will experience the strongest growth in 2019, reaching $457 billion, up 9% from $419 billion in 2018,” according to research firm Gartner.
Gartner data indicate that the market could swell by nearly 11% next year to $507 billion. The ability to capture more of the cloud computing market will be vital to the longer-term thesis for CRM stock.
“As cloud becomes increasingly mainstream over the next few years, it will influence ever-greater portions of enterprise IT decisions, in particular system infrastructure,” Gartner’s Vice President of Research John-David Lovelock said. “… Over this forecast period it will expand to cover additional application software segments, including office suites, content services and collaboration services.”
Other analysts concur that the outlook for CRM stock remains compelling. Baird recently labeled the stock a “fresh pick,” noting it’s attractively valued at current levels.
“ServiceNow’s commentary around the resilience of Digital Transformation spend amid broader IT spending fears, as well as the potential that the company will address margin framework more directly at upcoming Dreamforce analyst day, bode well for CRM,” Baird analysts said. “We view current valuation as compelling.”
The Bottom Line on CRM Stock
CRM stock could easily be more of a winner than a disappointment. If investors can recalibrate revenue growth expectations to 20% or under, the company’s cross-selling proficiency can drive the winning thesis.
Bottom line: CRM stock can be a long-term winner in its respective market segments and analysts concur with that assessment.
“We believe Salesforce.com represents one of best long-term growth stories in software,” according to Morningstar. “Even as revenue growth seems likely to dip below 20% for the first time at some point in the next five years, we believe ongoing margin expansion should continue to compound earnings growth of more than 20% annually for much longer.”
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.
