➡️ This is a step-by-step stock review to determine if Salesforce (CRM) stock is a good buy. In this article, we’ll help you understand the company, where the company is going, the competition, and the leadership. This way you can make a more confident investment decision.
Salesforce is a global tech company founded in 1999, is headquartered in San Francisco, CA, and has office locations in the US, Argentina, Brazil, Mexico, Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, The Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, UK, Israel, Morocco, Australia, New Zealand, China, India, and Korea. They are known for its CRM (customer relationship management) platform which provides a wide variety of features and benefits for sales, customer service, marketing automation, e-commerce, analytics, and application development.
Table of Contents
- Step 1: Tykr Rating
- Step 2: Salesforce Company History
- Step 3: Salesforce Business Model
- Step 4: Salesforce News
- Step 5: Salesforce Competition
- Step 6: Salesforce 4Ms
- Step 7: Is Salesforce (CRM) stock a good buy?
Step 1: Tykr Rating
➡️ Goal: When you look at a stock, the first step is to look at the financials. Fortunately, Tykr does this for us automatically. The higher the score, the stronger the financials and the safer the investment. The higher the MOS, the higher the potential returns you can make.
- Summary: Watch
- Score: 61/100
- MOS: 0%
- Share Price: $197
- Fair Value: $170
Step 2: Salesforce Company History
➡️ Goal: It’s important to know the company’s history. This helps us understand the various revenue streams, if they acquired other companies, how they grew through difficult times, and how they separated themselves from the competition.
- In 1999, former Oracle executive Marc Benioff, Parker Harris, Dave Moellenhoff, and Frank Dominguez founded Salesforce. The first investors included Oracle CEO Larry Ellison and CNET.
- From 2000 – 2002, Salesforce was severely affected by the dot-com bubble and had to lay off 20% of the workforce.
- In 2001, revenues were $5.4M.
- In 2003, revenues exceeded $100M.
- In 2003, Salesforce held its first Dreamforce conference in San Francisco.
- In 2004, Salesforce went public.
- In 2005, Salesforce launched AppExchange which includes third-party applications that are built to integrate with Salesforce. As of 2021, there are over 5,000 apps listed on the platform.
- In 2009, revenues exceeded $1B.
- In 2009, Salesforce launched Service Cloud, a customer relationship management (CRM) platform for customer service and support.
- In 2014, Salesforce launched Trailhead, a free online learning platform where you can learn in-demand Salesforce skills, earn resume-worth Salesforce credentials, and network with other Tailblazer users.
- In 2014, Salesforce began the development of the Customer Success Platform is the official name of their portfolio of products.
- In 2016, Salesforce announced the launch of Einstein, an AI platform that powers several of Salesforce’s cloud services.
- In 2018, Keith Block became co-CEO with Marc Benioff.
- In 2019, Salesforce joined The Dow Jones Industrial Average (DJIA), a stock market index that tracks 30 large blue-chip companies trading on the New York Stock Exchange (NYSE) and Nasdaq. Fun Fact: Since the Dow was founded in 1896, it has rotated stocks 57 times with GE having the longest presence.
- In 2020, Keith Block stepped down from the co-CEO role.
- In 2020, announced it would acquire Slack for $27B, its largest acquisition at the time.
- In 2021, Bret Taylor became co-CEO with Marc Benioff.
- In 2022, Salesforce surpassed SAP as the world’s largest enterprise software company.
- In 2022, Salesforce announced a partnership with Meta Platforms. The deal included Meta’s WhatsApp integration with Salesforce’s Customer 360 platform to allow consumers to communicate with companies directly.
- In 2022, Bret Taylor stepped down from the co-CEO role.
- In 2023, Salesforce announced it would lay off about 10% of its workforce or approximately 8,000 positions. According to Benioff, they hired too aggressively during the Covid-19 pandemic. Salesforce also announced it would reduce office space because they allow employees to work from home.
Step 3: Salesforce Business Model
How does Salesforce make money?
➡️ Goal: It’s important to know how a company makes money. A mature business model has multiple streams of revenue which allow the company to weather downturns in the economy.
Salesforce provides enterprise cloud SaaS solutions available for desktop and mobile. They also offer professional services to facilitate the adoption of their solutions.
Salesforce generates through 5 major channels in 2 categories.
- Subscription (SaaS) – 4 channels – 94% of revenue
- Professional Services – 1 channel – 6% of revenue
- Sales Cloud – The Sales Cloud enables companies to grow their sales pipelines, close more deals, improve sales productivity, and gain valuable business insights. Their customers use the Sales Cloud to access accurate customer and prospect information, track leads and progress, forecast opportunities and collaborate around closing a sale on any device. The Sales Cloud also encompasses partner relationship management functionality (including channel management and partner portals) and real-time customer and contact information.
- Service Cloud – The Service Cloud enables companies to connect with their customers and effectively address their service and support needs. Their customers use the Service Cloud to connect their customer service agents with customers across every channel including phone, email, chat, self-service web portals, social networks, and online communities. In addition, built-in collaboration tools enable customer service teams to share information on how to better serve customers.
- Marketing Cloud – Their customers use the Marketing Cloud to analyze conversations taking place on public social networks like Facebook, Twitter, and blogs. Marketing Cloud can also publish content to engage with customers across social networks, as well as to their own websites. The Marketing Cloud provides sophisticated analytics that enables companies to better identify sales leads and customer service issues, discover advocates, rapidly identify brands, products, or support issues and analyze content across social networks. Relevant conversations can be routed into the Sales Cloud and Service Cloud in the form of leads, contacts, and customer service cases to give companies a complete view of their customers.
- The Salesforce Platform – The Salesforce Platform provides the infrastructure and many of the services that application developers need to build and deliver business apps. The Salesforce Platform is delivered as a service, enabling IT departments and independent software vendors (“ISVs”) to be more efficient, dedicating their time to building apps, rather than managing hardware and software. With the Salesforce Platform, developers have the freedom to develop apps in many of today’s most popular programming languages, including Java and Ruby.
- Professional Services – Salesforce offers consulting, deployment, and training services to customers to facilitate the adoption of their software solutions. Most of their consulting and deployment engagements are billed on a time and materials basis which means they charge an hourly rate as opposed to a project fee. Salesforce also offers traditional classroom and online educational classes that address topics such as deploying, using, administering, and developing on their platforms. They also offer classes for partners who deploy their service on behalf of our customers. They bill the traditional classroom and some of the online education classes on a per-person, per-class basis. There is a selection of online educational classes available at no charge to customers that subscribe to our service.
I would like to highlight the power of the Salesforce AppExchange. Salesforce has about 150,000 customers and 90% of those customers are using at least one app from the AppExchange. The AppExchange allows third-party companies to develop apps and list those apps on the AppExchange. Most of these apps are SaaS products and Salesforce simply takes a cut of each transaction. Salesforce charges a 15% commission for payments made with bank transfers and 15% + $.30 for payments made with credit cards. In other words, Salesforce isn’t developing the apps. They created an ecosystem where third-party developers can develop apps and share revenues as other companies use the apps.
Here is an example of how this works.
- Let’s say a developer, we’ll call him Jimmy, built an app that bolts onto Salesforce and helps companies with Electronic Signatures, similar to Docusign.
- Jimmy decides to list that app for $20/user/month ($20 per user per month).
- A mortgage company, we’ll call it ABC Mortgage, has 100 employees and is using Salesforce to track leads and sales. They decide they want to move away from signing physical pieces of paper so they head to the Salesforce AppExchange to look for an Electronic Signature tool that bolts onto Salesforce. They see Jimmy’s app and decide to purchase licenses for 50 employees.
- 50 employes x $20 per month = $1,000 per month. 15% or $150 is paid to Salesforce and the remaining $850 per month is paid to Jimmy.
- Now let’s say 50 other companies, the same size as ABC Mortage, want to use Jimmy’s App.
- 50 companies x 50 employees percompany x $20 per month = $50,000 per month. 15% or $7,500 is paid to Salesforce and the remaining $42,500 per month is paid to Jimmy.
As you can see, Salesforce has created a cashflow monster with very few costs except for hosting the exchange itself. This is a brilliant business model.
Salesforce has also acquired other companies and each company generates more revenue streams for Salesforce. Here is a list of the top 10.
- Buddy Media
Step 4: Salesforce News
➡️ Goal: It’s important to highlight important company-specific news as well as industry-specific news over the last month and year. We don’t need daily news on a company to make buy or sell decisions because we’re investors, not traders. Overall, we want sufficient news to understand where a company and industry are heading over the next year or few years.
This video from Morningstar talks about 3 top tech stocks to buy and hold in 2023. Those stocks include ASML Holding, Salesforce, and ServiceNow. Salesforce is mentioned because of the growing portfolio of solutions found in the AppExchange. Not only is the Salesforce CRM a sticky product but once customers use apps that bolt onto Salesforce, the platform because even more sticky.
This article from investorplace.com lists 7 growth stocks to consider buying in the cloud computing sector. Those stocks include Amazon, Salesforce, Adobe, Microsoft, Snowflake, Datadog, and Palo Alto Networks. Salesforce is listed because it has generated double-digit revenue and EBITDA growth over the past several years and the platform is highly sticky.
This article from seekingalpha.com highlights two stocks that are strong buys in 2023. Those stocks include Salesforce and Google. Both are listed because they continue to remain profitable in a difficult economic environment. Although both stocks were down in 2022, Salesforce is already up 40% for the year and Google is already up 22% for the year. As the market continues to improve, investors should see more returns with both stocks.
Step 5: Salesforce Competition
➡️ Goal: It’s important to understand who the competitors are and how their financials rank against this company. Try to find 5 other competitors to rank against based on Score. The best way to find competitors is to Google “XYZ competition” and replace XYZ with the company name. You can also go to Tykr and click on the “Similar Stocks” tab on each stock to see similar companies in the same industry.
- Summary: Watch
- Score: 61/100
- MOS: 0%
- Share Price: $197
- Fair Value: $170
- Revenue: $31.3B
- Summary: Watch
- Score: 78/100
- MOS: 0%
- Share Price: $282
- Fair Value: $265
- Revenue: $198.1B
- Competitive product: Microsoft Dynamics 365
- Summary: Watch
- Score: 67/100
- MOS: 0%
- Share Price: $132
- Fair Value: $171
- Revenue: $519M
Microsoft Dynamics 365 and Monday.com are two of the top publicly traded companies with competitive CRM solutions. There are also many other private companies with CRM solutions including Zoho, ActiveCampaign, FreshSales, Neon, Insightly, and more.
Step 6: Salesforce 4Ms
➡️ Goal: All of our homework on this company leads up to the 4M checklist. A lot of investors only look at the numbers. Yes, it’s important to look at the first M (MOS) which is the math part of investing but it’s also important to look past the numbers and also look at the business, the competition, and the management. If all 4Ms pass, we should have high confidence in buying this stock.
✅ MOS: Salesforce is currently a Watch within Tykr. The score of 61/100 is good but we could see a little improvement with the MOS which is 0%. A lot of tech companies have seen a decrease in net income and EPS because of the economy. However, as the economy continues to improve, the EPS of Salesforce and other tech stocks will likely increase again.
✅ Meaning: CRMs are very sticky. Once a CRM, especially Salesforce CRM is integrated within a company, it will most likely remain in place for another 5, 7, or 10 years.
✅ Moat: There are a lot of private CRM companies but most of these platforms are lighter weight and less expensive with a higher emphasis on SMBs (Small and mid-sized businesses). Salesforce is the go-to enterprise solution for other large corporations. A key differentiator with Salesforce over its competitors is the AppExchange. The ecosystem of apps allows third-party developers to make money and customers get more use out of Salesforce. The AppExchange in itself was a brilliant business model from day one.
✅ Management: Marc Benioff got started in tech, earlier than most. He founded his first company, Liberty Software, at the age of 15. He went on to get a B.S. in business administration for University of Southern California. He then Interned at Apple for 4 months. Thereafter he started working at Oracle and worked his way up to the youngest VP in the company over 13 years. He then founded Salesforce in 1999 and his first investor was Oracle CEO, Larry Ellison. On two previous occasions, he promoted other individuals to help lead the company as co-CEO. Keith Block from 2018 – 2020 and Bret Taylor from 2021 – 2022. Block stepped down and remained in the position as advisor to CEO for 4 months before leaving and starting a venture capital firm. Bret Taylor left Salesforce to pursue entrepreneurial endeavors in the AI space. Benioff has stated, “I have found that having a co-CEO relationship is extremely important because it allows more balance in the operation of the company.”
The problem is, when co-CEOs leave, it can be implied as contention in the C suite which can cause the share price to drop. Will Benioff look for a third co-CEO? Maybe. This is a small risk for investors. When looking at Glassdoor, the company score is 4.2 out of 5 and the CEO approval is 82%. Both are fantastic scores. Benioff has also been recognized as of the world’s 25 greatest business leaders by Fortune and one of the 10 best-perming CEOs by Harvard Business Review.
Step 7: Is Salesforce (CRM) stock a good buy?
Although the first M (MOS) isn’t On Sale, the other 3 Ms (Meaning, Moat, and Management) look great. My favorite part of this company is the Moat with the AppExchange. That is a key differentiator that other CRM companies will have a hard time duplicating. Salesforce has generated a 62% return over the last 5 years and an annualized return of about 10%. As of April of 2023, Salesforce has already generated a return of 40% in 2023. The economy has been improving but we’re not out of the bear market/recession yet. When the market really starts to take off, Salesforce investors could reap some larger returns.
The Summary, Score, and MOS of this stock may have changed since the posting of this review. Please login to Tykr to see up-to-date information.
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