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Stock Analyst Update

Salesforce Follows Through on Slack Acquisition

We are maintaining our fair value estimate of $253 for Salesforce as good organic results are offset by the seemingly modest deleterious impact on shareholder value arising from the Slack acquisition.

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Wide-moat Salesforce (CRM) reported strong results, including meaningful upside to both revenue and non-GAAP EPS, while guidance for the fourth quarter was mixed. Stealing the thunder from fine results was the formal announcement that the company is acquiring Slack (WORK) , and this dominated the earnings call. We have mixed feelings on the Slack acquisition. Salesforce has done a nice job identifying strategic targets and smoothly integrating both products and operations, so we think they can do the same with Slack, which was characterized as an opportunistic deal. That said, we think the price tag was steep at $28 billion in total and about $46 per share, based on deal terms of $26.79 in cash and 0.0776 shares of Salesforce common stock. This deal price compares with our $20 standalone fair value estimate for Slack.

We are maintaining our fair value estimate of $253 for Salesforce as good organic results are offset by the seemingly modest deleterious impact on shareholder value arising from the Slack acquisition. With the recent pullback, we think Salesforce shares are looking increasingly attractive.

Revenue grew 20% year over year to $5.419 billion, which blew through both our above-consensus estimate and guidance. All segments were ahead, with the most notable upside relative to our model coming from platform and marketing cloud, which were 5% and 4% ahead of our estimates, respectively. Demand remains strong on all fronts and attrition remains better than management anticipated. Billings and current remaining performance obligation, or CRPO, both grew more slowly than revenue, which is a bit of a blemish on an otherwise good quarter.

Non-GAAP operating margin was strong at 19.8%, compared with 19.4% a year ago and our above-consensus model at 17.7%. Non-GAAP EPS of $1.74 benefited by $0.86 from mark-to-market accounting, but were still $0.10 better than our above consensus estimate. Strong revenue and expense discipline drove margin and EPS upside.

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Dan Romanoff does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.