Software stocks continue to get pounded. Even the market leaders aren’t immune. Salesforce.com (NYSE:CRM), for example, has broken the $200 mark after being above $300 just a few months ago. It’s been an incredible turn of fortune as the formerly hottest sector in the market has now gone ice cold.
The truth is that many software-as-a-service “SaaS” companies had unsustainable valuations in 2021. Investors modeled in too much recurring growth from what was really just sped-up demand due to work-from-home trends during the pandemic. As growth slows to more normal levels, valuations have plummeted.
While this is true across the SaaS space, some firms are much better equipped to deal with this new reality than others. CRM stock should be one of the relative outperformers in this new and more difficult market environment. Here’s why.
Becoming An Ecosystem, Not Just A Service
Software-as-a-Service “SaaS” companies are quickly realizing that they need to become broad platforms rather than just entities which offer one particular service.
It’s not enough to dominate a niche anymore, at least not if you want to keep growing. The SaaS leaders of the 2020s will have to keep adding new adjacent markets and service offerings on top of its core business to keep the growth machine humming.
Investors and company managers were already starting to realize this over the past few years. However, the reality is fully sinking now as we watch SaaS firm after SaaS firm see revenues decelerate and their stock prices implode. The pandemic-driven rush is over, and now companies have to prepare for a much harsher environment.
This sort of sudden boom and then bust creates a moment of introspection for the industry and its investors. We can’t just keep modeling exponential growth to the sky anymore. Now, folks have to be more realistic about a company’s actual real total addressable market, its competition, and if and when it will become self-sustaining (i.e. generate real profits and cash flows).
Salesforce Built a Platform Before it Was Cool
Salesforce figured this out years ago, and thus is way ahead of the curve. Over the years, Salesforce has made a number of acquisitions that observers found baffling at the time. Its recent purchase of Slack, for example, was widely viewed as a dubious move.
As the perceptions swing around the SaaS industry, however, this is changing. Now, it appears, Slack’s seemingly bizarre M&A strategy actually had some solid fundamental underpinning to it.
This is how something like the Slack acquisition made so much sense. Salesforce gobbled up a major time sink for office employees and made sure that all that communication and data would occur under Salesforce’s umbrella.
Microsoft’s (NASDAQ:MSFT) Teams didn’t grab so much market share because it’s a particularly amazing product or user experience. It did so more because most employees had access to Microsoft anyway, so a good enough offering that fit on top of Office would get the job done. Salesforce is building and buying the tools necessary to fight back against the big tech titans.
SaaS’ Reliable and Trustworthy Partner
Salesforce is building the sort of safe reliable platform that large enterprises can rely on to handle vast portions of their overall IT burden. Since Salesforce offers cloud communications, marketing, sales, and so on, it’s an option that a Fortune 500 company can pick knowing there is little downside risk to their selection. Maybe Salesforce isn’t the best at any particular thing it does, but it’s good enough in many categories, and that makes it a reliable option for a risk-averse IT director.
Moreover, once Salesforce gets installed somewhere, it’s hard to remove. Like with IBM (NYSE:IBM) mainframes 30 years ago, once a business relies on Salesforce for everything from its marketing database to its internal Slack channel, the odds of it defecting anytime soon are minimal.
Other SaaS companies are just now rushing to build a broader platform of services and offerings for customers. Salesforce, however, was on this trend years ago and has thus already carved out a huge chunk of valuable turf.
CRM Stock Verdict
The thing that really makes Salesforce stand out to me now is that it has developed a broad SaaS platform well ahead of most rivals, and I believe the market will give the firm a premium valuation as folks start to reassess the software landscape in this new post-Covid slowdown era.
Morningstar’s Dan Romanoff agrees with that view, and has CRM stock as a compelling pick today. Romanoff see shares being worth $320, which is more than 60% upside from the current price. Here’s a bit of his reasoning for that outlook:
“We view shares of wide-moat Salesforce.com as increasingly attractive in the recent sell-off related to growth-oriented technology stocks, and we highlight it among our top picks […] 2022 should see continued robust demand. We think the company benefited from strong demand throughout COVID-19, as customer-related software became an imperative for companies trying to do business in a new remote reality.”
A lot of SaaS companies that thrived in 2020 and 2021 will struggle going forward. Salesforce can stand out, however, given its mission-critical product offerings and its robust platform. Salesforce is several moves ahead of the competition, and that will be vital as SaaS firms adapt to the new economic landscape.
On the date of publication, Ian Bezek held a long position in IBM and CRM stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a sizable New York City-based hedge fund. You can reach him on Twitter at @irbezek.
