Even though Salesforce (currently trading at $196.55 per share) has gained 6.2% over the last six months, it has lagged the S&P 500’s 11.7% return during that period. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Salesforce, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Salesforce Not Exciting?
We’re sitting this one out for now. Here are three reasons why CRM doesn’t excite us, plus one stock we’d rather own.
1. Weak Billings Point to Soft Demand
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
Salesforce’s billings came in at $7.18 billion in Q1, and over the last four quarters, its year-on-year growth averaged 10.5%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Salesforce’s revenue to rise by 10%, close to its 13.9% annualized growth for the past five years. This projection is underwhelming and indicates its newer products and services will not accelerate its top-line performance yet.
3. Operating Margin Rising, Profits Up
Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This metric shows how much revenue remains after accounting for all core expenses — everything from the cost of goods sold to sales and R&D.
Analyzing the trend in its profitability, Salesforce’s operating margin rose by 1.1 percentage points over the last two years, as its sales growth gave it operating leverage. Its operating margin for the trailing 12 months was 20.4%.
Final Judgment
Salesforce’s business quality ultimately falls short of our standards. With its shares trailing the market in recent months, the stock trades at 3.6× forward price-to-sales (or $196.55 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We’re pretty confident there are superior stocks to buy right now. We’d suggest looking at the Amazon and PayPal of Latin America.
Stocks We Like More Than Salesforce
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