Is Salesforce Stock a Buy Ahead of Earnings?

Salesforce NYSE: CRM is slated to release its Q4 earnings today after the bell; the cloud-based software company is expected to see revenue growth of 17.1% and EPS growth of 13.8%. But Salesforce has a solid track record of beating expectations, so expect those numbers to be even better.

So, case closed? Go out and buy Salesforce stock?

Not exactly. You see, the market has almost certainly priced in a beat. Salesforce would have to exceed the whisper numbers for shares to surge after the bell today.

There is a good chance that Salesforce will top the whisper numbers though. Its solutions have helped companies build out curbside pickup options, do contact tracing, and manage employee shifts to mitigate the effects of the pandemic. With COVID-19 cases peaking over the winter, more companies likely turned to Salesforce to improve operational efficiency.

A post-earnings jump would be nice, but what should really get you excited about Salesforce is its long-term outlook.

Revenue Could Grow at Nearly 20% CAGR Over the Next 5 Years

Salesforce had its investor day presentation in December; management expects the company to generate $50 billion in revenue in fiscal 2026. Revenue for full-year fiscal 2021 is projected to be $21.12 billion, so that would work out to a 18.8% CAGR between fiscal 2021 and fiscal 2026.

Don’t Sleep on Slack

Management expects Slack NYSE: WORK – which Salesforce agreed to acquire for $27.7 billion on December 1 – to more than quadruple its revenue to $4 billion by fiscal 2026. Many investors feel that Salesforce overpaid for Slack. They also fear that the business communication platform is an awkward fit with Salesforce.

In regards to the price: the valuation was up-there, but fast-growing tech companies don’t come cheap. Salesforce is paying for what Slack could become in 5+ years.

In regards to the fit: Salesforce plans to integrate Slack with its existing services, making it easier for its clients’ employees to communicate with each other. A smooth integration won’t be easy, but it’s certainly possible. Salesforce’s track record indicates that the company could pull it off.

Salesforce Has the Biggest Piece of a Growing Market

According to Grand View Research, the global customer relationship management (CRM) market was valued at $40.2 billion in 2019. The report, which was published in April 2020, concluded that the market would grow at a 14.2% CAGR between 2020 and 2027.

Salesforce held a 19.8% share of the global CRM market in the first half of 2020, according to IDC. The company is miles ahead of its rivals. SAP NYSE: SAP, Oracle NYSE: ORCL, Microsoft NASDAQ: MSFT, and Adobe NASDAQ: ADBE are Salesforce’s four closest rivals; they combined for just a 17.8% share of the market in the same time period.

Salesforce is in an ideal position. It is really far ahead of its competition, but at the same time, the company still has a lot of room to grow its market share. If the industry does grow at a CAGR of around 14.2% over the next 6-7 years and Salesforce increases its market share to around 30%? Look out.

The Company Thrives in Every Economic Environment

Salesforce’s services help companies automate repetitive tasks so that they are less dependent on human employees. In other words, Salesforce helps companies save money.

Companies want to save money when the economy is booming. And they want to save money when the economy is contracting. Yes, Salesforce benefited in some ways from the pandemic. But Salesforce was increasing in popularity pre-pandemic and it will continue to increase in popularity in a post-pandemic world.

CRM shares barely budged on the November 9 vaccine news for good reason.

How Should You Play Salesforce?

Salesforce shares were riding high in late August after the company handily beat second-quarter estimates. They looked to be on their way to $300. But the rally didn’t last, and shares are now more than $40 off their highs.Some investors are nervous about Salesforce’s valuation; it is trading at 8.7x forward sales and 68.5x forward earnings.

But revenue is projected to more than double over the next five years. Earnings could grow even more than that. And Salesforce’s top and bottom-line growth are likely to remain in the double-digits in the second half of the 2020s. You could make an argument for a triple-digit earnings multiple on Salesforce right now.

Bottom line: the potential for near-term multiple expansion and long-term growth makes Salesforce an attractive proposition.