Unlike a few companies that I discussed last week, Salesforce.com (CRM) doesn't exactly qualify as a value play. But it is a marquee cloud software name trading at much lower multiples than some of its peers, and which is both doing some things and benefiting from some trends that markets might not be fully appreciating right now.
Salesforce's $203 billion enterprise value (EV - market cap minus net cash) is equal to 8.9 times a fiscal 2021 (ends in January 2021) FactSet billings consensus of $22.8 billion, and 7.4 times a fiscal 2022 billings consensus of $27.4 billion.
Those aren't quite dirt-cheap multiples, and one does need to account for both Salesforce's large sales/marketing expenses -- partly a by-product of its go-to-market strategy -- and generous use of stock comp when valuing the company. But they don't feel particularly high either for a company that's the clear leader in a major enterprise software field with clear secular growth drivers (CRM software), and which is expected to see roughly 20% sales and billings growth during its next fiscal year.
And compared with what some large-cap, high-growth, enterprise software names are trading at right now, Salesforce's multiples look pretty low.
Whereas Salesforce has an EV equal to 7.9 times its fiscal 2022 revenue consensus, nearly 20 U.S.-traded software names with $10 billion-plus market caps have EVs equal to more than 20 times their out-year revenue consensus. The list includes prominent names such as Atlassian (TEAM) (25.8x), DocuSign (DOCU) (22.5x), Zoom (ZM) (28.3x), Salesforce partner Veeva Systems (VEEV) (23.6x) and of course Snowflake (SNOW) (74x - no, that's not a typo).
Salesforce's out-year EV/sales multiple is also below Microsoft's (MSFT) 9.2x, in spite of the fact that (in addition to enterprise software and cloud services) Microsoft derives a lot of revenue from lower-margin hardware and consumer Internet services businesses, and from its Windows cash cow. It's also comfortably below Adobe's (ADBE) 13.8x, Autodesk's (ADSK) 15.5x and ServiceNow's (NOW) 19x.
And unlike some names with much higher valuations, Salesforce is already throwing off significant amounts of free cash flow (FCF). It generated $3.7 billion worth of FCF in fiscal 2020, and its fiscal 2022 FCF consensus stands at $5.2 billion.
This FCF is being generated even though Salesforce continues making giant sales/marketing investments to drive future growth. In some ways, sales and marketing investments are for Salesforce what fulfillment and logistics investments are for Amazon.com (AMZN) : A cost center where the company is repeatedly willing to make outsized investments that depress near-term profits, in order to strengthen its hold on valuable customers and grow both its long-term sales and mindshare with them.
Meanwhile, some of the enterprise tech trends that COVID has ignited or accelerated should give Salesforce top and bottom-line boosts in the coming years.
The shift toward remote sales and customer support work will be a positive for Salesforce's Sales Cloud and Service Cloud platforms, while also likely lowering Salesforce's own expenses a bit. The inflection seen this year in e-commerce adoption is a positive for Salesforce's Commerce Cloud platform, while the inflection seen in cloud software adoption benefits Salesforce's Heroku and Lightning app development platforms. And the acceleration seen in the long-term shift towards online marketing is a positive for Salesforce's Marketing Cloud platform
Then there's the matter of the pending Slack (WORK) acquisition, which got a thumbs-down from equity markets but which I think has -- in spite of a somewhat elevated deal price of roughly $25 billion in cash and stock -- a decent chance of paying off.
When announcing the deal, Salesforce outlined a compelling vision of having Slack act as a "system of engagement" for its CRM offerings -- connecting salespeople, customer support workers and others in customer-facing roles with co-workers, customers and partners, and giving them a unified view of customer data.
This vision, which naturally benefits from the aforementioned shift towards remote work, is made possible in part by the fast-growing Slack Connect platform for company-to-company messaging -- a platform whose long-term potential still doesn't seem fully appreciated by Wall Street, and for which Microsoft Teams currently offers nothing comparable.
Microsoft is still admittedly a threat that Salesforce investors need to stay mindful of -- at this point, arguably a bigger threat than traditional CRM rivals Oracle (ORCL) and SAP (SAP) -- and not just because of Teams. While Microsoft's Dynamics CRM apps have historically been more aimed at small and mid-sized businesses than Salesforce's offerings, the company is stepping up its efforts to promote Dynamics to major enterprise clients, while also integrating Dynamics with other Microsoft platforms such as LinkedIn and its Power BI business intelligence software.
Also, if we see a general bloodletting among high-multiple tech stocks, there's a good chance that Salesforce won't be completely spared, even if its comparably low valuation leads it to be stung less than many peers.
Those two caveats aside, Salesforce currently looks like the rare example of a market-leading, high-growth, cloud software franchise that's on solid competitive footing and is still trading at moderate sales and billings multiples. Those wanting more enterprise software exposure but feeling sticker shock when surveying the space might want to take a look, particularly if markets correct.
