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Salesforce: On Track to Become the ‘Most Profitable Software Company in the World’

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When it comes to the software industry, Salesforce (NYSE: CRM) has consistently stood out. The company’s stock has often traded at premium valuations compared to its tech peers, and for good reason. Salesforce is one of the pioneers of the subscription revenue model and has a track record of delivering strong financial performance.

In recent quarters, Salesforce has achieved impressive margin expansion even in a challenging macro environment. This has been a testament to the company’s ability to sustain and grow profit margins. As a result, I firmly believe that Salesforce has the potential to become the most profitable software company in the world.

CRM Stock Price: A Lukewarm Investment?

While Salesforce has experienced strong profit growth over the years, its stock performance has been somewhat lukewarm. This can be attributed to the deceleration in top-line growth, which has put pressure on the valuation multiple. However, the stock has shown signs of bouncing back recently.

Despite the challenges, Salesforce’s deep product portfolio and the integration of generative artificial intelligence (AI) capabilities have helped drive near-term revenue growth rates. The company’s focus on cross-selling new products to existing customers has also been beneficial. As a result, the stock is now trading at a fair multiple of just under 6x sales.

CRM Stock Key Metrics

In its most recent quarter, Salesforce delivered 11% year-over-year revenue growth, surpassing guidance. However, the company continues to face headwinds in the EMEA region, likely due in part to the Russia-Ukraine conflict. Additionally, segments such as MuleSoft and Slack have experienced a slowdown in growth.

On a positive note, Salesforce achieved 11% year-over-year growth in current remaining performance obligations, suggesting that double-digit revenue growth can be sustained for the foreseeable future.

The company also repurchased $1.9 billion of stock in the last quarter, showcasing its commitment to driving profit expansion and returning cash to shareholders. With a strong net cash balance sheet and positive guidance for full-year revenues and earnings per share, Salesforce is well-positioned for continued growth.

Is CRM Stock A Buy, Sell, or Hold?

Based on my analysis, Salesforce’s near-term revenue growth rates are being bolstered by generative AI and its deep product portfolio. The company’s dramatic operating margin expansion has also contributed to a healthier valuation. Consensus estimates for low double-digit top-line growth appear achievable, especially as the macro environment improves.

Looking ahead, the stock is reasonably priced on a price-to-earnings basis, making it an attractive investment option. While there are risks such as potential top-line deceleration, Salesforce’s financial stability, expanding cash flow margins, and strong market position mitigate those concerns.

Considering Salesforce’s strong financial position, GARP-like valuation, and the potential for continued growth, I maintain my buy rating for the stock.

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