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Massive Growth, Profitability Opportunities for Salesforce

Rodney Nelson

Rodney Nelson: In our view, Salesforce.com represents one of the best secular stories in software, as the firm boasts massive growth and profitability opportunities. The company has been a pioneer in cloud-based software, and now holds an increasingly dominant position across the entire customer relationship management space. As enterprises continue to migrate legacy applications to the cloud, we believe Salesforce will be one of the prime beneficiaries.

Salesforce.com's wide moat is based on two key sources: customer switching costs and network effects. In the case of the former, customers are increasingly utilizing multiple applications from the Salesforce.com platform. These applications, such as salesforce automation or customer service, are mission-critical to revenue-generating and customer retention activities, yielding high levels of customer switching costs. Furthermore, as customers generate more data across multiple products, Salesforce can build new functionality into its products on the fly, while customers can build custom applications leveraging multiple data sources, creating a mutually beneficial network.

We think Salesforce represents an attractive investment opportunity today, with shares trading at a nearly 25% discount to our fair value estimate.