Salesforce Is on Sale

Bulls Say

• Salesforce.com dominates salesforce automation but still has only 30% of a highly fragmented market that continues to grow by double digits each year, suggesting there is room to run.
• Added legs to the overall growth story include customer service, marketing automation, e-commerce, analytics, and artificial intelligence.
• The company's margins are subscale, with a runway to more than 100 basis points of operating expansion annually for the next decade. Management has put more emphasis on expanding margins in recent quarters.

Bears Say

• As the company grows larger, driving 20% revenue growth is likely to become increasingly difficult.
• Salesforce has entered new areas via acquisition and has arguably paid material premiums in the process. Integration risk is real, as is the risk of increasingly large, dilutive, or ill-conceived deals.
• As big as Salesforce is already, it generates substandard margins.

Morningstar Analyst Dan Romanoff Says

We believe Salesforce.com CRM represents one of best long-term growth stories in software. Even as revenue growth is likely to dip below 20% for the first time at some point in the next several years, we believe ongoing margin expansion should continue to compound earnings growth of more than 20% annually for much longer.

After introducing the software-as-a-service model to the world, Salesforce has assembled a front-office empire that it can build on for years to come, in our view. Sales Cloud is the original salesforce automation product, which streamlined process management for sales leads and opportunities, contact and account data, process tracking, approvals, and territory tracking. Salesforce’s critical differentiator was that the software was accessed through a web browser and delivered over the Internet, thus inventing the SaaS software delivery model.

Service Cloud brought in customer service applications, and Marketing Cloud delivers marketing automation solutions. These solutions encompass nearly all aspects of customer acquisition and retention and, in our view, are mission-critical. Salesforce Platform offers customers a platform-as-a-service solution, complete with the AppExchange, as a way to rapidly create and distribute apps. We believe this strengthens the substantial community of Salesforce users.

We expect Salesforce will benefit further from natural cross-selling among its clouds, upselling more robust features within product lines, pricing actions, international growth, and continued acquisitions such as the recent deals for Slack and Tableau. Salesforce is widely considered a leader in each of its served markets. This is attractive on its own, but the tight integration among the solutions and the natural fit they have with one another makes for a powerful value proposition, in our view. More than half of the company’s enterprise customers use multiple clouds. Further, customer retention has gradually improved and is now better than 90%, which we expect to grind higher still in the coming years.

Key Proprietary Morningstar Metrics

Fair Value Estimate: $320 Star Rating: 5 Stars Economic Moat Rating: Wide Moat Trend Rating: Positive

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