Navigating Uncharted Waters, A Company's Resilient Path To AI And Data Cloud Dominance

Key Takeaways

• Salesforce's AI-focused investments and data management highlight a strategy for future growth through advanced AI solutions and data cloud service expansion.
  
• Partnerships with major companies like Amazon and Google, and a focus on multi-cloud deals, suggest efforts to boost revenue through ecosystem enhancement and customer engagement.
  
• Salesforce's growth and financial stability are challenged by competitive pressures, sales strategy risks, organizational shifts, new pricing models, and global economic uncertainties.

Catalysts

Provides Customer Relationship Management (CRM) technology that brings companies and customers together worldwide.

• Salesforce's significant investment in artificial intelligence (AI) and their large-scale management of 250 petabytes of data indicate a strong future growth catalyst, impacting future revenue through offering advanced AI solutions.
  
• Expansion of Data Cloud as highlighted by its inclusion in 25% of $1 million-plus deals and the addition of over 1,000 customers for the second consecutive quarter suggests substantial revenue growth from increasing data cloud services demand.
  
• The creation of a Zero Copy Partner Network with major partners like Amazon and Google can drive Salesforce's revenue by enhancing the company's ecosystem and making its data platform more accessible and integrable for customers.
  
• Salesforce's commitment to maintaining a high non-GAAP operating margin of 32.5% suggests a focus on profitability improvements through efficiency and cost management, potentially impacting net margins positively.
  
• The emphasis on multi-cloud deals and the record of integrating Data Cloud into a significant portion of large contracts could lead to increased customer spend per engagement, boosting subscription and support revenue growth.

Assumptions

• Analysts are assuming Salesforce's revenue will grow by 9.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.4% today to 18.6% in 3 years time.
• Analysts expect earnings to reach $8.9 billion (and earnings per share of $8.65) by about November 2027, up from $5.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $7.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 46.9x on those 2027 earnings, down from 54.9x today. This future PE is greater than the current PE for the US Software industry at 41.0x.
• Analysts expect the number of shares outstanding to grow by 2.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.98%, as per the Simply Wall St company report.

Risks

• Salesforce faces challenges from high levels of market competition in AI and CRM technologies, potentially hindering its ability to maintain its market share, affecting future revenues.
  
• The reliance on achieving 3x pipeline multiples for sales could indicate an increased sales execution risk in a measured buying environment, potentially impacting future revenue growth.
  
• Organizational changes in the go-to-market strategy may disrupt short-term sales productivity, possibly leading to inconsistent quarterly performance and impacting revenue and earnings.
  
• The transition to new business models and pricing strategies, such as consumption-based pricing, might slow down customer adoption rates or lead to pricing pressure, affecting revenue and margins.
  
• Exposure to global macroeconomic fluctuations, including high interest rates and economic uncertainty, could lead to reduced spending by clients, impacting Salesforce's revenue growth and cash flow.

Valuation

• The analysts have a consensus price target of $331.16 for Salesforce based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $415.0, and the most bearish reporting a price target of just $236.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $47.7 billion, earnings will come to $8.9 billion, and it would be trading on a PE ratio of 46.9x, assuming you use a discount rate of 7.0%.
• Given the current share price of $323.43, the analyst's price target of $331.16 is 2.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.