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Stock Analyst Update

Salesforce Brings Home Epic Quarter; FVE Up to $253

Based on strong results and guidance we are substantially raising our fair value estimate to $253 per share, from $202 for wide-moat Salesforce. That said, like many software stocks, shares of Salesforce have run and we view them as approximately fairly valued.

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For its second quarter, Salesforce (CRM) reported excellent results and materially raised its outlook for the year. This quarter represents an exclamation point after last quarter’s reasonable results and cautious guidance. Results are generally consistent with software peers who are experiencing robust demand arising from the need to accelerate the broad digital transformation efforts that were already underway, as companies are confronted with the reality that they lack the flexibility required to support remote work in a more sustainable manner long-term. Based on strong results and guidance we are substantially raising our fair value estimate to $253 per share, from $202 for wide-moat Salesforce. That said, like many software stocks, shares of Salesforce have run and we view them as approximately fairly valued.

Revenue grew 29% year over year to $5.151 billion, which blew through estimates from both us and the Street, as well as guidance of $4.890 billion to $4.900 billion. Revenue was 5% ahead of our near-consensus estimates, which is truly impressive for a company this size. All segments were ahead, with the most notable upside relative to our model coming from platform and service, which were 11% and 8% ahead of our estimates, respectively. Management noted increasing customer confidence as the quarter progressed and reported that attrition came in better than anticipated.

Non-GAAP operating margin was very strong at 20.2%, compared with 14.3% a year ago and both us and CapIQ consensus near 16%. Non-GAAP EPS was $1.44, compared with $0.67 a year ago, and both us and CapIQ consensus also at $0.67. Non-GAAP EPS benefited by $0.58 from marked-to-market accounting. Strong revenue and expense discipline drove margin and EPS upside. For the year, management now believes it can produce 75 basis points of margin expansion even with stepped-up hiring in the second half of the year. Just last quarter, management believed margins would be flat for the year.

 

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Dan Romanoff does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.