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Stock Analyst Update

More Room to Run for Salesforce, Increasing Fair Value

We still anticipate additional upside for the wide-moat firm even after its impressive year-to-date run.

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After transferring coverage of  Salesforce.com (CRM) to a new analyst, we are raising our fair value estimate to $175 per share, from $158 previously, and maintaining our wide moat rating, positive trend, and medium uncertainty ratings. We continue to believe Salesforce benefits from strong switching costs and a network effect in terms of its platform offerings. The firm's acquisition of MuleSoft (acquired at an expensive multiple of 22 times revenue) and incremental investments in its AI tools (Einstein) embolden our confidence in Salesforce's increasing switching costs. With shares trading at a discount to our fair value estimate, even after an impressive year-to-date run, we still anticipate additional upside for Salesforce and still see this as an attractive point of entry. The firm's prospects are buoyed by salient trends, such as a shift to cloud applications and enterprises undergoing a digital transformation. These trends, coupled with robust aggregate CRM spending growth, will propel Salesforce's top line, in our opinion.

The firm reported second-quarter 2019 earnings on Aug. 29. Salesforce's second-quarter revenue of $3.3 billion and diluted GAAP EPS of $0.39 per share sat at the upper end of our expectations. Our estimates for fiscal 2019 revenue are now $13.2 billion, targeting the high end of management's guidance range. We attribute shares selling off to muted third-quarter EPS guidance, but we were impressed with full-year targets.

MuleSoft and verticalization remained the story during the quarter. MuleSoft's Anypoint Integration Platform allows Salesforce to essentially become the glue behind the entire IT systems of major enterprises, while concurrently strengthening the interconnection between Salesforce's various clouds. Our fair value increase is largely based on greater expectations for MuleSoft's growth, which we model on a standalone basis. Second, we see vertical products, like Health Cloud, as crucial to the firm's long-term growth story.

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

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