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Stock Analyst Update

Salesforce Tops Expectations; FVE up to $292

We are raising our fair value estimate for wide-moat Salesforce to $292 per share, from $273, based on quarterly strength and higher guidance, and continue to see shares as undervalued.

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We are raising our fair value estimate for wide-moat Salesforce (CRM) to $292 per share, from $273, based on quarterly strength and higher guidance, and continue to see shares as undervalued. The company reported strong fiscal second-quarter results, including upside to both revenue and non-GAAP EPS guidance. Salesforce’s third-quarter revenue guidance was robust while full-year targets were raised once again. The Slack acquisition closed in the waning days of the quarter and did not have a material impact on results. Management remains bullish on the pipeline when viewed from any angle and believes margin improvements are sustainable after normalizing for recent acquisitions. Customer conversations continue to grow increasingly strategic, which continues to drive larger deals.

Revenue grew 23% year over year to $6.34 billion, which blew through the high end of guidance. On a year-over-year basis, sales cloud grew 15%, service cloud grew 23%, platform/other grew 24%, and marketing cloud grew 28%. Management characterized all segments, all geographies, and all customer sizes as strong, and highlighted a number of multicloud deals, with the public sector once again performing well in the quarter. We note improved churn as well. Current remaining performance obligation, or CRPO, grew 23% year over year, which was in line with revenue growth and is a positive indicator for revenue growth.

Non-GAAP operating margin was strong at 20.4%, compared with 20.2% a year ago and indicates the medium-term earnings power for when the integration of Slack is complete. We think CFO Amy Weaver’s focus on margins will be a welcome evolution for investors, as she repeatedly returned to a mantra of “discipline.” Strong revenue and investment discipline drove margin strength and even after normalizing for $0.43 in investment gains, non-GAAP EPS was much higher than expected. We view results as consistent with our thesis for long-term margin expansion by at least 100 basis points annually. 

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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.