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Stock Analyst Update

Salesforce Goes on Autopilot After Impressive Q3

We see shares as attractive and remain more constructive than ever on the company's long-term margin potential.

We raise our fair value estimate for wide-moat Salesforce (CRM) to $320 per share, from $312, based on quarterly strength and inclusive of a 6% sell-off in after-hours trading, we see shares as attractive. We think the negative initial reaction is based on guidance for decelerating current remaining performance obligation, or CRPO, in the fourth quarter. We think this is passing and that other positive guidance indicators should serve as an offset. The firm reported strong fiscal third-quarter results, including upside to the high end of guidance for both revenue and non-GAAP EPS. Salesforce also announced that Bret Taylor was promoted to co-CEO and vice chairman of the board, which we view as sharp succession planning. Salesforce’s outlook for the fourth quarter was mixed, with revenue better than expected and non-GAAP EPS a bit light.

Revenue grew 27% year over year to $6.86 billion, compared to FactSet consensus of $6.79 billion. We note this is the first full quarter containing Slack financials, which management characterized as well ahead of internal expectations. On a year-over-year basis, sales cloud grew 17%, service cloud grew 21%, platform/other (including Slack) grew 51%, marketing/commerce cloud grew 25%, and the newly created data segment grew 20%. We are impressed by continued acceleration in sales cloud. Management noted strength in all segments, all geographies, and all customer sizes, with 33% year-over-year growth for deals involving five or more clouds. Churn improved to its best-ever level at less than 8%. CRPO grew 23% year over year to $18.80 billion, which is slightly below revenue growth but not alarming.

Non-GAAP operating margin was strong at 19.8%, flat compared to last year but more than 200 basis points ahead of our model. We remain more constructive than ever on the company's long-term margin potential, including 100 basis points of annual expansion, given management's recent focus and strong results in the face of the Slack acquisition.

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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.