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Stock Analyst Update

Salesforce Reports Good Results, Shares Undervalued

The wide-moat firm benefits from strong switching costs and a network effect related to its platform-based software offerings.


 Salesforce (CRM) reported a good third-quarter result and consequently raised its full-year revenue and EPS outlook. Still, we had been expecting a strong result from this wide moat firm and only modestly adjust our full-year expectations. Our $180 fair value estimate is unchanged and we continue to see the firm trading at a discount. We believe Salesforce benefits from strong switching costs and a network effect related to its platform-based software offerings. Additionally, with the addition of MuleSoft and a concerted investment approach to artificial intelligence tools, we are confident in heightened stickiness around Salesforce's product portfolio.

For the quarter, reported and constant currency revenue rose 26% year over year to $3.39 billion. Total remaining performance obligation, or RPO, rose 34% to $21.2 billion, while current RPO increased 27% to $10 billion indicating a very healthy level of revenue in the future pipeline. Salesforce's bread-and-butter sales cloud and service cloud revenue grew 11% and 24%, respectively. Meanwhile, the smaller Salesforce platform & other and marketing cloud & commerce cloud platforms surged 51% and 37%, respectively. Although we expect some sales moderation in the more mature sales cloud business, we continue to forecast rapid growth for the less mature cloud businesses given a large total addressable market opportunity.

Enterprise demand for digital transformation products and services will remain a tailwind for Salesforce and we believe the firm’s leading status in customer relationship management, among other burgeoning lines of business, will underline the firm’s solid long-term standing in the market. Breadth and depth of the company’s product offering will also attract enterprises as they seek to simplify their IT and infrastructure. As a result, we are confident in Salesforce’s wide moat rating.

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Andrew Lange 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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