The Salesforce Inc (NYSE:CRM) stock outlook is promising. CRM has risen over 12% year to date. Compared to 2023, Salesforce stock more than doubled in price last year.
With such a massive price increase, is the stock extremely undervalued, or have the fundamentals improved so much that now might be the last time to get in the stock at a reasonable price?
Below are three reasons why I think now is the prime time to get in.
The CRM Stock Outlook
Currently, Grand View Research estimates the CRM software market to be $65.59 billion in 2023 and growing at a 13.9% CAGR till 2030. With $29 billion coming from its subscription and support segment, that means it has over 44% of the market share.
CRM is a critical part of almost every single business, as it powers a company’s sales operation, which a company needs to have running no matter the budget restraints.
Salesforce was one of the first CRM software providers and is undoubtedly the most reliable as 83% of Fortune 500 companies use Salesforce.
The costs of switching from Salesforce are high. Switching to a different software requires time and resources, leading to lost productivity.
Corporate leaders risk their careers by forcing a switch to inferior software, halting operations.
As a result, Salesforce has had a high retention rate that’s improved from 88% to around 92% in recent years, showing its stickiness.
Cash Flow Generation
The company is balancing growth and shareholder value. Operating margins have improved 10% YoY, multiplying earnings nearly 5 times.
Salesforce consistently generates strong free cash flow, rewarding shareholders. FCF has grown at double-digit rates every year since 2014. FCF increased from $909M in 2014 to $11.52B in 2024, a 10-year CAGR of over 28%.
Despite investor complaints, consistent cash flow indicates future benefits. The company’s consistent free cash flow generation supports its profit-focused approach.
Declining Sales Temporary
Investors are concerned about Salesforce’s declining revenue growth. Despite a solid 11% YoY growth, it remains below historic averages. The company clearly prioritizes profitability over growth.
AI is a potential force that could rapidly revive it. Since unveiling its first AI model in 2016, Salesforce has made rapid progress with generative AI, offering it on the platform for an extra $231 per user per month. AI integrated into Salesforce increases client productivity by automating sales tasks and improving customer request resolution.
With more productivity gains from AI, businesses would likely be attached to Salesforce and boost their sales by purchasing the AI add-on.
Currently, Salesforce trades at a price-to-sales ratio of 7.9x, compared to when it traded above 10x back in 2020 even though the stock price was lower. This shows that investors are still valuing its revenue today lower than back then despite achieving more profitability and having better prospects with AI.
The Bottom Line
With its stock price having exploded in the past year and prospects only getting better, now could be one of the last times to pick up the stock under $300.
CRM’s dominance remains unchallenged, the company continues to become more profitable, and its sales are being rejuvenated by developments in AI.
On the date of publication, Michael Que did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
The researchers contributing to this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
