We came across a bullish thesis on Salesforce, Inc. (CRM) on Elliot’s Musings’ Substack by Elliot. In this article we will summarize the bulls’ thesis on CRM. Salesforce, Inc. (CRM) share was trading at $255.19 as of Sept 17th.
Pixabay/Public Domain
Salesforce seems like a good investment despite facing decelerating top-line growth and heightened competition. The company’s recent earnings report highlighted a 10% year-over-year revenue increase, showcasing solid performance, although growth has slowed compared to previous periods. New revenue growth also showed signs of deceleration both year-over-year and sequentially, reflecting challenges in maintaining previous expansion rates.
Financially, Salesforce demonstrated strong operating performance, with operating margins improving by 170 basis points to 33.7% in Q2. This margin expansion allowed the company to raise its full-year margin guidance to 33.8%, indicating effective expense management and operational efficiency. On the cash flow front, Salesforce increased its full-year operating cash flow guidance to a 25% year-over-year growth, signaling robust cash generation. The company returned $4.3 billion to shareholders through buybacks and dividends in Q2, reinforcing its commitment to shareholder value. Additionally, cRPO (contracted remaining performance obligation) grew by 10% year-over-year, exceeding both guidance and street estimates.
Geographically, Salesforce saw a deceleration in revenue growth in the Americas to high single digits, primarily due to a more challenging environment for small and medium-sized businesses (SMBs) and sectors like technology and professional services, impacted by macroeconomic pressures and increased competition.
On the AI front, Salesforce signed over 1,500 AI deals during the quarter, with AI bookings doubling quarter-over-quarter. This rapid growth indicates that while AI is not yet a major revenue driver, it is becoming a crucial part of Salesforce’s value proposition. The introduction of Agentforce, an AI-driven product designed to automate administrative tasks, has received positive early feedback and could significantly enhance productivity for customers when it becomes generally available in October. Multi-cloud adoption also remains a strong growth driver, with 16,000 customers adding new clouds during the quarter. The Data Cloud segment showed impressive growth, with paid customers increasing by 130% year-over-year.
In terms of valuation, Salesforce is currently trading at a 5% free cash flow (FCF) yield. If the stock maintains a 20x FCF multiple, investors can expect high single-digit to low double-digit returns. To achieve a 10% annualized return by 2028, Salesforce would need to realize a high single-digit top-line compound annual growth rate, reaching approximately $53 billion in revenue with 35% FCF margins, which would generate around $18.5 billion in FCF. Should Salesforce successfully leverage AI to drive additional top-line growth, there is potential for multiple expansions, enhancing forward returns and making it an attractive investment opportunity.
Salesforce, Inc. is on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 117 hedge fund portfolios held CRM at the end of the second quarter which was 154 in the previous quarter. While we acknowledge the risk and potential of CRM as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CRM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: Analyst Sees a New $25 Billion “Opportunity” for NVIDIA and 10 Best of Breed Stocks to Buy For The Third Quarter of 2024 According to Bank of America.
Disclosure: None. This article was originally published at Insider Monkey.