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Salesforce Crushes Expectations; Shares Undervalued

We are maintaining our fair value estimate of $186 and view shares as attractive.

Salesforce CRM reported material upside versus our third-quarter expectations and offered guidance that was consistent with various guidance measures provided at Dreamforce. We think strong results are supportive of our investment case that Salesforce is a clear leader in digital transformation given their customers desire to have a 360-degree view of their own customers, and that a broadening portfolio should help drive exceptional growth for years to come. The excitement around MuleSoft and Tableau are obvious and seem to be contributing meaningfully to customer interest. We are maintaining our fair value estimate of $186 and view shares as attractive.

Revenue grew 33% year over year to $4.513 billion, compared with our above consensus (CapIQ) estimate of $4.455 billion. We see strength in all clouds for the quarter, notably from Platform, which includes both Tableau and MuleSoft. Management noted acceleration in MuleSoft, as customers are keenly interested in tying together all systems in order to maximize the value of trapped data. This dovetails nicely with the Tableau acquisition, for which management characterized the revenue contribution as better than expected in the quarter. Europe defied macro forces arising from Brexit, and actually grew 42% year over year, which outpaced all other regions.

Non-GAAP operating margin surprised to the upside again, clocking in 19.4%, compared with 16.9% a year ago. Better than expected revenue is mostly responsible, but we also think management is incrementally more serious on operating expenses than they have been in the past. Salesforce has been targeting 125-150 basis points in margin improvement annually, which we think is achievable outside of larger acquisitions. Non-GAAP EPS was $0.75, which was up from $0.61 last year, still blew past our above-consensus (CapIQ) estimate of $0.67. Better revenue, better expense management, and to a lesser extent, a lower share count, and a $0.01 nonoperating benefit drove EPS.

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