How Salesforce Stock Can Be Doubled In The Upcoming Years?

By Rajat Kesarwani| Monday, Sep 20, 2020 16:25 PM | 5 min read

In November 2019, Salesforce delivered a double quarter earnings report that contradicted the research on CRM stock, the debate was that its growth was going down. CRM's results also confirmed the strength of its underlying, continuous trends. A month later, when the market was in full selloff tone due to recession concerns, research-firm Evercore examined a bullish nature on Salesforce stock. Notice that companies offering cloud services could benefit from a slow economy since such companies provide services that aim to cut costs.

However, there has been nothing but positive developments for CRM's growth outlook over the past three months. During that time, CRM stock has risen just 4%. Despite the continued improvement of the company's fundamentals, the silenced move of Salesforce stock has created an opportunity for long-term investors.

However, we can say that CRM is a rapidly growing company with a great channel and a leadership position in a rapidly growing cloud market backed by some most suitable and common growth trends in the global economy. While investors are investing in Salesforce's rapid growth, there is an opportunity for CRM stock to grow more. As a result, long-term investors would be wise to ignore the near-term noise of Salesforce stock. For the long-term, CRM stock is heading higher.

The company demolished expectations by releasing the following figures for the second quarter of its FY 2021:

• Revenue grew by 29% year-over-year to $5.15B.
• Subscription and support revenues grew by 29% year-over-year to $4.84B.
• Professional services and other revenues grew by 23% year-over-year to $0.30B.
• Gross profit grew by 27% to $3.84B.
• Operating income was $178 million.
• According to the company's CFO, net income was $2.6B, which benefited by a $2 billion net tax benefit. GAAP EPS was $2.85, and non-GAAP EPS was $1.44.
• Free cash flow is up 22% year-over-year.
• Total cash, cash equivalents, and commercial securities amount to $9.3B, and debt is $2.6B.

Remarkably, the company recorded double-digit growth rates in all of its business areas. However, we can say that Salesforce stock is a long-term winner. It is at the heart of the cloud and data revolutions. The volume of data globally is ranging higher right now because of the increase of the Internet of Things (IoT) and large companies' movement to accumulate and analyze Big Data. Additionally, every company these days is going digital, which means they are turning towards the cloud.

It is estimated that only 20% of the company's workloads have shifted to the cloud. Due to the price, convenience, and accessibility advantages of cloud solutions, the number will rise close to 100%. In terms of data, many companies are still collecting, storing, and analyzing Big Data. As the world moves towards digital technologies, the volume of data collection, storage, and analysis will only grow. It is the reason why Salesforce experts predicted that the Big Data market would continue to grow by double-digit percentage rates over the upcoming years.

CRM is self-possessed to benefit from two vital positive catalysts that are in their initial stage. There is a lot of conflict in the industry. But this competition will not impact Salesforce. However, Salesforce is the leading CRM market with approx. 20% share, and for the last couple of years, the company's revenue has increased at a constant 20% plus rate.

The Cost Intimates that CRM Stock can be Double

Salesforce's revenue is assumed to reach under $15 billion in 2020, and the addressable business is valued at $150 billion, or nearly ten-fold its expected 2019 top line. Additionally, CRM's management has shown different and extraordinary expertise to develop new products through additional applications and acquisitions.

By increasing its top line 15-20% every year, the CRM can grow its annual revenue from under $15 billion today, to roughly %50 billion by 2027. Meanwhile, CRM's gross margins will be at 80%, as its operating-spending rate will fall towards 50%.

Salesforce's operating profits are set to reach $15 billion by 2027. however, removing out 20% for tax is close to $12 billion in net profits. Growth stocks typically exchange at an average of 20 times their forward earnings.

Application software stocks trade at an average of about 30 times their forward incomes, while data-processing stocks have an average forward multiple of 23. Data systems stocks have a normal forward multiple of 20.

20 seems like a more reliable assessment of CRM's forward price-earnings multiple after it has grown for several more years. A 20 forward multiple on $12 billion of net profits in 2027 would result in a 2026 valuation of $240 billion. That's more than double the current $110 billion market cap of Salesforce stock.

Significant Undervaluation Compared to the Rival Group and Other SaaS Companies

With a market cap of $244B, Salesforce.com is currently together with Adobe (ADBE), the most significant SaaS company. Additionally, Salesforce is the largest SaaS company by revenue. It also has a relatively high revenue growth rate of 29% in Q2.

However, Salesforce is the largest SaaS company by revenue and market cap. Still, it seems to be a requirement for corporate clients based on the revenue roll, notwithstanding the pandemic, and it shows a significant undervaluation compared to other SaaS companies on a forward EV to revenue basis. Even though some of its rivals even have a significantly smaller market share, and it generates much lesser revenue.

Salesforce is currently up 26% following the day of its Q2 earnings release. If today's rush in the share price is factored out, Salesforce.com had an EV/revenue multiple of just 7.4. when compared with Adobe, it has a current forward EV/revenue multiple of over 18. If Salesforce were now to pick up with Adobe's or other large SaaS rivals' valuation, the share price would have to double. However, Salesforce produces a bit less free cash flow in comparison with Adobe.

The Bottom Line

With its revenue expected to grow at a 20% plus annual rate, Salesforce also has nearly 80% gross boundaries and disclosure to multiple growth tailwinds that will continue, unbroken, for an extended period. With that said, it is quite obvious to say that Salesforce stock is a long-term winner.