Salesforce.com, inc.'s (NYSE:CRM) Price Seems to Have Stabilized and the Fundamentals are Growing Strong

Investors in salesforce.com, inc. ( NYSE:CRM ) had a good week, as its shares rose 2.1% to close at US$196 and the stock looks like it's stabilizing from the decline. Today, we will go through the key fundamentals of the company, see if the stock is growing at a healthy pace and working on profitability.

Growth Fundamentals

In the last 5 years salesforce.com, inc. has increased its revenue by 215.7%, going from US8.4b in January 2017 to US$26.5b in January 2022. This results in a CAGR of 25.8% over the last 5 years. Unfortunately, last year the company's revenues increased by 24.7%, which is close to the 3-year average growth rate of 26.0%. Some may see that as a sign that growth might be slowing down at the moment, but in general this is a high number. The company may ramp up or find new avenues of growth in the future, or their previous acquisitions like Slack might start paying off.

In order to assess the quality of growth, we also want to know if salesforce is scaling well in relation to costs. By looking at the financials, we see that COGS has grown by 4.5% more than revenue, meaning that the company is sacrificing some efficacy in order to drive growth. This could be part of their focus on expansion or that they are reaching permanent increases in cost. This is not necessarily bad, if the new costs help distinguish them from the competition by building better / more complex products.

Growth vs. costs is one way to look at it, the other is growth vs. profitability.

Revenues scaled about as good as total expenses (-0.1% difference), indicating that at the end of the day, salesforce has a disciplined cost structure.

The key point, is that CRM has relatively stable growth, but given the type of business, investors might expect it to start decelerating. However, the company is keeping an eye on expenses and is not sacrificing margins to force growth. In that case, last year's 24.7% growth is quite an impressive number.

Profitability

Just like we want the company to grow, we want to be part of a business that can capture large portions of that growth. This translates into free cash flows to investors and is the ultimate driver of the stock price.

Going from the top-down, we start with the Gross Margin.

The gross margin is currently at 73.5%, which is reasonably high, and gives the company ample room to spend on business development.

Moving down the income statement, in the last 12 months, the company made US$1.272b in EBIT. This represents a margin of 4.8% . Which is more than the median 3-year EBIT margin of 3.8%. The business seems to have improved, and investors may see this being reflected in the future cash flows, should this trend continue. When comparing CRM to a more mature company such as ( XTRA:SAP ), we can see that the company can aspire to reach a 20% EBIT margin in the future.

A positive and growing EBIT margin is one of the key metrics used in determining if a business has built a system that is significantly better than the competition. Older companies seek to optimize it, while younger companies post it as a preliminary sign of the potential of their business model, and it is great to see CRM moving forward with profitability.

Price Target & Future Estimates

A company's value lies in the future cash flows, that is why we have analyst forecasts going forward to 2025 on which investors can use to build their image of the value of CRM. We also build our general valuation model which you can see here .

The 43 analysts covering salesforce.com are now predicting revenues of US$32.1b in 2023. If met, this would reflect a substantial 21% improvement in sales compared to the last 12 months.Statutory earnings per share are forecast to dive 65% to US$0.51 in the same period.

You can see how that pans out, in the chart below:

Check out our latest analysis for salesforce.com

The analysts reconfirmed their price target of US$300 , showing that the business is executing well and in line with expectations.

However, the range of expectations can offer a much better picture:

• The most bullish analyst values salesforce.com at US$385 per share
• The most bearish prices it at US$225

Given that CRM is currently trading at US$196.4, it seems that analysts expect significant upside for the stock.

The Bottom Line

CRM is executing its top line growth without sacrificing margins. EBIT margins are also growing as the business matures. Comparing to older peers, we can expect CRM to reach a high 20% EBIT margin in the future, which is arguably where most of the value lies.

Both conservative and average price targets imply a significant upside, and the current drop in price seems to have stabilized.

The price movements might be more of a reflection of what is happening within financial institutions instead of the current value of salesforce.

Before you take the next step you should know about the 4 warning signs for salesforce.com that we have uncovered.

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Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.