Salesforce (NYSE:CRM) was started by an Oracle (NASDAQ:ORCL) salesman who wanted to sell Oracle’s database as a service. About a week ago, CRM stock passed Oracle in market cap.
Software as a Service (SaaS), delivered by the cloud, is the technology revolution of the last two decades. Salesforce has been on top of it. Oracle, with the same relational database technology, has resisted it. This has made all the difference.
Oracle hasn’t exactly suffered. Oracle founder Larry Ellison is still the world’s fifth-richest man, with a fortune of almost $71 billion. It’s just that had he responded correctly to the market trends, he would almost doubtless be first. Salesforce founder Marc Benioff, who controls much less of his company, is No. 274 on the list, worth $7.7 billion.
But as an investor of CRM stock, you would have done much better with Benioff, and you still will today.
Salesforce’s Secret Sauce
In its first decade, Salesforce’s secret sauce was multitenancy. Every customer was using the same database to relate to their customers, but they only had access to their own data. In practice it meant improvements in the application could be shared by all customers. It wasn’t open source, but it had the same effect.
In its second decade, Salesforce made cloud its secret sauce. Benioff negotiated among the major cloud providers – Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL,NASDAQ:GOOG) so customers could host data wherever they needed it. Salesforce also built its own data centers and expanded into other database application areas – human resources, enterprise planning, health, the Internet of Things.
Essentially, Salesforce future-proofed its applications for customers. It saw what they might want a year or two out and made sure that was provided for. It worked to gain their trust and expanded horizontally as well as vertically. Oracle thought it was selling databases. Benioff understood he was selling a service.
The Result
The result for CRM stock investors has been steady growth in their money. Money left with Oracle has done very little. Over the last five years, Salesforce stock has appreciated by an average of almost 35% each year. That’s how much Oracle is up over all five years.
Salesforce doesn’t offer a dividend, however. Oracle does, and that dividend is up 60% over the last five years. But there’s an old saying in tech. If you’re paying a dividend it’s because you don’t know what to do with your investor’s money.
The key metric for Salesforce investors, as it is at Amazon, is operating cash flow. This has tripled over the last five years, exceeding $5 billion for the 2020 fiscal year. Oracle has more operating cash flow, over $13 billion, but its growth has stalled out.
Salesforce also had almost $8 billion of cash at the end of its 2020 fiscal year, against $5.5 billion of long-term debt. The comparable figures for Oracle are $47 billion in cash and $70 billion in long-term debt.
The Bottom Line on CRM Stock
In terms of sales Oracle remains twice as big as Salesforce. It had revenue of almost $40 billion last year, against Salesforce’s $17 billion.
But for investors that’s not the key measure. Growth matters more. The potential for future growth matters more. Staying on top of change for the benefit of customers matters more.
This is what Salesforce has done, using the exact same database technology as Oracle. Salesforce has literally beaten Oracle at its own game.
Even today, Salesforce is a better investment. Of 26 analysts who follow Salesforce, 23 say buy it. Of the 21 that follow Oracle only 7 say buy it.
I agree. Buy Salesforce and leave the older technology in your wake.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT and AMZN.
