Why Salesforce Stock Is Cheap (NYSE:CRM)

wdstock/iStock Editorial via Getty Images

Salesforce (NYSE:CRM) shares soared 10% yesterday after the CRM company submitted a strong earnings sheet for Q1’23 which included a raised earnings outlook for FY 2023. Salesforce continued to grow revenues and free cash flow rapidly in the first quarter, and the Platform business is seeing growing momentum. Top line growth is expected to remain strong and the firm’s shares are cheap!

Strong Business Momentum In The Platform Segment

Salesforce submitted a strong earnings card for Q1’23 that included revenues of $7.41B, showing 24% year-over-year growth, and non-GAAP diluted earnings per-share of $0.98. Both numbers, revenues and EPS, beat predictions.

Seeking Alpha

Besides continual top line momentum, which is increasingly driven by growth in Salesforce’s “Platform and Other” segment, the CRM provider revealed a sequential improvement in its non-GAAP operating margin from 15% in Q4’22 to 17.6% in Q1’23.

Salesforce

Salesforce’s performance in the first-quarter was once again driven by strong execution in all business segments, but the “Platform and Other” segment once again stood out with the fastest growth in the first-quarter. “Platform and Other” is Salesforce’s custom app development platform and is seeing strong customer demand.

There are four metrics that I believe show how important this segment has become for Salesforce recently. First, “Platform and Other” had the fastest top line growth of all of Salesforce’s business segments in the first quarter, at 55%. Second, the segment is seeing sequential top line acceleration, as Q4’22 segment revenue growth was 53%. Third, the revenue share of the Platform segment has increased from 16.5% in the year-earlier period to 20.7% in Q1’23 while all other segments have seen declines in their percentage shares. Fourth, the Platform segment is growing three times faster than Salesforce’s two biggest segments “Service” and “Sales”, regarding dollar contribution. I estimate that the Platform business will become Salesforce’s second-largest segment (by dollar contribution) by the end of next year.

Subscription & Support Revenues ($m)

Q1’23

Q4’22

Q3’22

Q2’22

Q1’22

Y/Y Growth

Sales

$1,632

$1,586

$1,538

$1,477

$1,388

18%

Service

$1,761

$1,710

$1,658

$1,600

$1,506

17%

Platform and Other

$1,419

$1,350

$1,277

$969

$913

55%

Marketing and Commerce

$1,089

$1,046

$1,006

$955

$895

22%

Data

$955

$1,136

$900

$913

$834

15%

Total

$6,856

$6,828

$6,379

$5,914

$5,536

24%

Revenue Share

Q1’23

Q4’22

Q3’22

Q2’22

Q1’22

Y/Y Growth

Sales

23.8%

23.2%

24.1%

25.0%

25.1%

(1.3) PP

Service

25.7%

25.0%

26.0%

27.1%

27.2%

(1.5) PP

Platform and Other

20.7%

19.8%

20.0%

16.4%

16.5%

4.2 PP

Marketing and Commerce

15.9%

15.3%

15.8%

16.1%

16.2%

(0.3) PP

Data

13.9%

16.6%

14.1%

15.4%

15.1%

(1.2) PP

(Source: Author)

Free Cash Flow And Margins

Not all companies in the cloud-space are created equal. Companies like Salesforce are already running profitable enterprises and generate a ton of free cash flow each year. Salesforce generated $3.50B of free cash flow in the first-quarter, showing 14% year-over-year growth, while the firm’s free cash flow margin soared: The firm’s FCF margin in the last quarter was 47.2%, a material improvement over Q4’22 (see below).

$millions

Q1’23

Q4’22

Q3’22

Q2’22

Q1’22

Subscription and Support

$6,856

$6,828

$6,379

$5,914

$5,536

Professional Services

$555

$498

$484

$426

$427

Revenues

$7,411

$7,326

$6,863

$6,340

$5,963

Cash Flow From Operating Activities

$3,676

$1,982

$404

$386

$3,228

Capital Expenditures

($179)

($167)

($166)

($213)

($171)

Free Cash Flow

$3,497

$1,815

$238

$173

$3,057

Free Cash Flow Margin

47.2%

24.8%

3.5%

2.7%

51.3%

(Source: Author)

Lowered Top Line Prediction

Salesforce cut its top line prediction for FY 2023, but only slightly. The customer relationship management company now sees $31.7B to $31.8B in revenues for the current fiscal year, which is down from a previous forecast of $32.0B to $32.1B. The updated revenue projection still implies solid 20% year-over-year growth compared against a previously expected top line growth rate of 21%.

The CRM firm, however, also expects to deliver strong margins exceeding 20%, on a non-GAAP basis, due to strong demand for Salesforce’s products and services. Due to improving operational leverage, Salesforce now expects higher per-share profits in FY 2023. The firm expects to see $4.74-4.76 per-share in adjusted profits this year, compared to a prior forecast of $4.62-4.64 per-share.

Salesforce

Cheap P/E Ratio For A High Growth CRM Company

Cloud companies are often not very profitable since they reinvest their cash flow into new products, services and scale. But Salesforce is already profitable and generates material free cash flow and earnings. Salesforce’s P/E ratio, on a forward basis, is 30X. Normally, this may be considered a high earnings multiplier factor, but Salesforce is expected to grow its earnings at an average rate of 18% over the next three years. Also, considering that Salesforce anticipates to grow its top line 20% in a difficult year, shares may be considered cheap.

Seeking Alpha

Risks With Salesforce

Multiple risks are present with Salesforce. Slowing top line growth is clearly a material risk factor for Salesforce and the stock. If revenue growth slows down, shares of Salesforce may be punished with a lower sales and earnings valuation factor. Additionally, a decline in free cash flow margins is a risk for the company. A change in either of the last two factors — slowing revenue growth and declining FCF margins — would likely get me to reevaluate my opinion on Salesforce.

Final Thoughts

Salesforce delivered a Q1’23 earnings card that continued to show strong execution, including 24% year-over-year top line growth and growing momentum in Salesforce’s Platform business. Salesforce also remained highly profitable regarding free cash flow, while showing an improvement in FCF margins. Considering that the CRM company is set to grow its top line 20% in FY 2023, a P/E ratio of 30X is cheap!

Exit mobile version