RiverPark Large Growth Fund is bullish on SalesForce.com, Inc. (NYSE:CRM), a $98.33-billion market cap customer relationship management software provider. In its Q1 Investor Letter, RiverPark discussed its thesis on CRM. Let’s take a look at the fund’s comments.
Salesforce.com is also a software vendor that, like Oracle, sells Customer Relationship Management (CRM) software. Unlike Oracle, however, CRM was created as a subscription offering from inception and was one of the main pioneers of the software-as-a-service (SaaS) business model. The cloud computing/SaaS movement is now a $100 billion global market and CRM is now one of the fastest-growing large-cap software companies in the world.
CRM has consistently grown revenue at greater than 20% each year since its founding in 1999 to more than $10 billion in sales last year. We believe that through price increases and new products to cross-sell to its large customer base, Salesforce can continue to drive greater than 20% annual revenue growth for the long-term. In fact, following a 48% increase in the company’s backlog in its most recent quarter, Marc Benioff, the company’s CEO, said he’d “never seen a demand environment like this,” as companies accelerate their investments around digital transformation initiatives, which plays squarely into Salesforce’s strengths.
Most importantly to us, after years of profitless pursuit of top-line growth, a combination of operating leverage and recent cost discipline has resulted in 15% operating margins (and a greater than 60% growth in free cash flow) that we believe are poised to expand significantly. We believe the company’s ongoing growth and cost initiatives pave the way to 20%-25% operating margins over the next four years and greater than 30% longer term. Although CRM has been a strong stock during its transition to strong profit growth, we believe that a period of rapidly expanding profit and free cash flow growth will support continued outperformance of the company’s shares in the years to come.
On Monday, CRM closed at $133.98. The stock jumped 55.47% over the past 12 months, while its year-to-date performance increased 28.32%. Over the past six months, CRM gained 29.24%. The stock has a consensus average recommendation of ‘Buy’ and a consensus average target price of $149.26, according to analysts polled by FactSet.
