Salesforce Stock Analysis - is CRM a Good Buy Today?

Hi, I'm Jimmy. In this video, we're looking at Salesforce, ticker symbol CRM. So, in this video, we're going to look at the basics of Salesforce's business. We're going to be look at be looking at how that business has evolved over the past few years and where they're trying to go in the next few years. Now, we're going to do this entire analysis on the Investors Go website. But either way, let's jump over and look at the segments to see to get a basic understanding of what Salesforce does. So, I know that there are a lot of different segments here, but as I'm looking at this, I actually think it's simpler if we just want to look simply at what they do. And then we'll get a bit more in the weeds as we go through some of their history. So, put simply, Salesforce makes cloud software that helps companies manage their relationships with their customers. That's what CRM stands for. It's customer relationship management. So the idea here is that they sell subscription services and those services try to help a company manage their business. They help the sales they help manage the sales pipeline. They help uh the marketing team develop marketing products. They have a messaging app. They try to use AI to help automate different components within the system. We'll come back to that in a second. Basically they try to help c their customers manage their customers relationships. Now with this in mind, let's look quickly at some of the charts so we can get a better understanding of the story as to how we got here today. So first let's take a quick look at revenue. And we can see that on this chart of revenue well looks fairly good. It has climbed steadily over the past couple years. But here we actually get a better view and it puts uh more of a spotlight on one of the aspects of CRM's business that a lot of investors have pushed back on. So this is a chart of revenue growth and we can see that for a while revenue growth was doing fairly well but in the past few years it hasn't looked nearly as good. So let's pause right here for a second so we can get a better understanding of how this happened. So let's roll back to the high growth time period here. CRM was doing everything they could to grow is kind of grow at all costs. For example in 2018 they acquired Mulesoft. They spent $6. 5 billion. 2019 they bought Tableau, spent almost 16 billion. 2020 they I think they spent about 28 billion for Slack. The idea was that they were going to keep adding components to their products and do everything they could to fuel growth. And those different acquisitions and growth initiatives that they put in place help them grow fairly fast. I mean, if you could if you look at this, they were growing revenue at quite a quick pace for a while. But then we can see that in 2023 well growth sort of ran into a wall and that's where the story gets interesting. So at that point in time while Salesforce was the number one CRM provider in the world they held about 23 24% of the total addressable market according to revenue. But then more and more competitors started entering the market and the tailwinds that co had provided well those were starting to fall off and revenue growth really began to struggle. Now at that time Microsoft had their product called Dynamics 365 CRM and that was picking up steam and they were able to package their CRM services with a lot of other Microsoft services like Teams or things like that and customers began to sign up for Microsoft. In fact, today Microsoft is their biggest competitor although they're not the only ones. Oracle has some enterprise software. Adobe has some especially around marketing. Uh then there's some smaller companies that go after uh smaller businesses, smaller to mid-size businesses. Company like HubSpot or Zoho. They target a smaller customer than Salesforce typically goes after, but still their competitors. So we're going to want to keep an eye on them. Okay. Now, we know that they've ran into growth issues around 2022. By the way, their fiscal year ends at the end of January. I'm going to come back to this a couple times because when you see fiscal year 2023, that actually ends in January of 2023. So, it's mostly 2022 we're looking at, but we'll keep that in the back of our mind as we jump over and look at Salesforce's net profit margins. And we can see when we get to profit margins here, well, this story is kind of the opposite of what we saw with revenue growth. For a while, the numbers were quite low. They spent everything they made pretty much trying to grow. And over the past couple years, well, those numbers have ramped up and looked much better. So, here's what happened. Once Salesforce began to realize that they were running into growth problems and thanks to some activist investors, well, the company began to realize that they needed to get more profitable and try to be more shareholder friendly. And ultimately they had to prove that the big investments that they made, all the acquisitions that they were making were worth it. And they had to prove that they could keep up with competition. So in 2023, actually it's fiscal year 2024.

Uh but that's actually the year 2023. Well, in 2023, this was a big transformation year for Salesforce's business. They cut their workforce by about 10%. They streamlined their real estate footprint. and management actually came out and openly admitted to the fact that they had hired too fast and they had expanded too quickly in pursuing growth. When they made all these acquisitions, they didn't necessarily streamline it and integrate them as well as they could have. So that they figured there was a lot of costs that could be caught that could be cut at that point. So that's exactly what they did. And by the middle of 2023, Salesforce had broken up their mergers and acquisitions committee and they started pushing harder for profitability. And clearly we can see on this chart well that they've done a good job of making that happen. Okay. Now this brings us to today and the elephant in the room today is let's call it the AI arms race. So in 2023 Salesforce announced that they had Einstein GPT. Now they had a uh product called Einstein for a while but they relaunched it as Einstein GPT which is more went more from data analytics to using AI to analyze the data and initiate out of their tasks. Basically the goal is to take the data from their customers business and try to help. They autogenerate sales emails. They autogenerate uh service chat responses. Uh they can autogenerate market content. Things like that. anything to try to help streamline the business each of their customers businesses. If they can help their customers backend and help let's say the their customers you know become more efficient well in theory Salesforce becomes more efficient and they get a stickier customer. Well, then Salesforce went ahead and introduced what they called agent force. And agent force is Salesforce's terms for their AI agent platform. And basically, it lets their customers custom create AI powered assistance and workflow within their Salesforce platform. Salesforce's management came out and said that Agent Force is their fastest growing product ever. They claim to have over 12,500 companies across 39 different countries that have all these companies have already signed up to use Agent Force. Now, despite these product offerings and despite some of the growth in products like Agent Force, well, 2024, they didn't have a great year. They came out and came out with weaker than expected revenue growth. And we can see here on this chart, well, the stock dropped almost 20% in a single day when they came out and lowered guidance for revenue growth. And we can see that drop happened on huge volume, which again is not a great sign for their stock. So at that time, management came out and said that their generative AI push has yet to have a real impact on revenue growth. Now, this is true for most companies, but this happened at the same time that companies like Microsoft and Service Now are promoting their own AI products that directly compete with Salesforce. Now, the good news is that Salesforce's customer 360 suite appears to be the bestin-class CRM package, and their management has said that most of their large clients are adding AI capabilities to their packages, which is likely a good sign for Salesforce in general. Now, as far as competitors go, Microsoft is still their biggest competitor. Since Microsoft can bundle like a ton of their individual products with their CRM platform, but for now, Salesforce is still the leader. It's estimated uh the most recent number I could find was from last year, and they had about 20. 7% of the market share. Again, this is according to revenue. Now, this is down about 1% from the year before, but it's still bigger than all of their other competitors. So they're about if you take the next three competitors, Salesforce is bigger than all three of them combined. Now I'm talking specifically for their CRM product. Obviously, uh Microsoft has more revenue than Salesforce. But if you take their CRM revenue and the other CRM competitors, well total Salesforce is still the biggest game in town. So now the real question becomes where is this industry going? Clearly AI is going to play a major role in the future of customer management and the fact that sales force is embracing that is a good sign and I recognize that products like agent force are growing quickly and customers are signing up to use it. But I personally think that it seems to me that right now AI is being positioned as sort of an add-on that you can give to your customers on top of what you're offering. Now, I think the day will come eventually where AI is kind of baked into the core product. I think that's where customers will expect that I think they're going to expect the AI tools to be part of the baseline package. And if that's the

case, it could put some pressure on a company like CRM's profit margins. I think we have to assume that every CRM company out there is going to be offering some version of AI before very long, which if nothing else increases competition from a lot of fronts. Now, Salesforce has for a long time been the premier product in the industry, and I think it's likely to stay that way for at least the next few years. So, with all of this in mind, let's jump in and try to look at the fair value for CRM stock. So, first we get over to the investors growth summary page here. Well, we can see that a lot of indicators are pointing to this stock could be undervalued. But let's dive in and look at discounted free cash flow so we can have a bit closer look at the numbers. So here we can see the dark blue bars here. Well, those are historical free cash flow numbers. And we can see that they've consistently generated positive free cash flow for a while and analysts expect that to broadly speaking to continue fairly good. And at first glance, well, this stock looks obscenely undervalued, which is likely a good sign. But you may notice this little red flag here. So, for SBC is letting us know that the company has a decent amount of stock-based compensation, and we may want to consider accounting for that. So, stock-based compensation is when a company gives employees equity ownership on top of their salary. Now the idea here is that these shares can dilute shareholders. So it's a real cost to us investors. But a lot of times it gets ignored with free cash flow since it's not a cash expense. Technically stockbased compensation would be removed from free cash flow. It wouldn't free cash flow is after stockbased compensation gets added back to it. But if we go ahead and check this box right here, well, what the investors grow platform does is it projects out stockbased compensation based on recent stock-based compensation and the trend of SBC over the past few years and essentially projects it out and then it removes it from our discount of free cash flow calculation. So now we can see that the red part of these bars here, well that is stockbased compensation both historically and projected our projected numbers. Well, we can see now the fair value changed pretty dramatically with this company. So the stock still is when accounting for stockbased compensation, it is still undervalued, which is again a good sign for potential investors. So for me on a personal basis, well, I like this company and in fact I know that the entire software market has been getting dragged down as the impact of AI is really unknown at this point on a lot of their businesses. But the fact that Salesforce has been so heavily invested in going down that remote that road and they remain one of the CRM leaders well I think that this is a good price and for me on a personal basis I want to add some additional shares of CRM stock to my portfolio. Now I already own a small piece but I want to add some additional shares at this price. Now I do think at some point as the future becomes a bit clearer over the coming years as to how AI is impacting things, well I think it's possible that once that happens and assuming CRM is still a big player in the game and there's no reason to believe that they won't be. Well, I think once that happens, CRM and other companies in other, let's say, software niches, I think they could end up getting revalued from this discount here to a much fairer value, and you might see a decent pop in this stock. Now, it might take a few years for that to happen. But since I'm a long-term investor, I can kind of sit and wait to see if it does happen. Now, if you want to sign up to get access to the Investors Grow website, I'll leave a link right here, link in the description below. And thank you so much for sticking with me all the way to the end of the video. I really do appreciate it.