What's up guys? nick here back with another video if you've owned salesforce stock over the past
couple of years there is no doubt that you have been thrilled with your investment it more than
doubled the s p 500 returns over the past five years but recently took a hit after they announced
that they were going to buy slack for 28 billion dollars i thought now would be a good time to
take a look at what actually is salesforce what's the stock worth and should you buy at the current
price so what is salesforce so it seems that not many people actually know what salesforce is
and what they do salesforce is a company that sells customer relationship management software
also called crm in general crm software allows businesses to gather customer interactions in one
centralized location to improve the businesses overall effectiveness and efficiency the major
area crm technology is used is in sales marketing and service sales teams can use it to track leads
and notes about their customers marketing can use some of those leads to assist with recommending
products and service can use the software to track customers issues and make sure they get
the resolution that they need salesforce is the leading crm company in the world with about 18
percent of the global market share 93 percent of the revenue actually comes from crm subscriptions
so this is pretty much all they do they were actually the first company to provide crm
software through a web-based service now i went through some of the reviews to see the experience
people had using salesforce versus some of the other crm companies i found that generally crm
companies require very capable it support systems and can get pretty complicated to run from an it
perspective i also found that salesforce software tends to be more user friendly for the actual
users than some of the other major competitors salesforce has four different categories of their
software the sales the service the marketing and commerce clouds and then the salesforce platform
the sales cloud provides tools for sales teams to store data monitor leads look for
opportunities and gain insight with analytics they can also manage quotes contracts and negotiations
through the sales cloud the service cloud helps with customer service communication
it helps link agents and provide different communication channels between them and their
customers like messaging chat and social media service representatives can also track and manage
issues the marketing and commerce cloud can use analytics to put relevant products in front of
their customers they can also integrate the marketing cloud with data from the sales and
service clouds to better understand what their customers want the commerce side of the cloud
provides a platform similar to shopify and they can use their data to optimize the website to
show things that their customer is more likely to be interested in the salesforce customer 360
platform allows it developers to build custom tools for their businesses so companies without
access to programmers can create their own tools they also have their own app store called the
app exchange where third-party developers can sell different apps to businesses salesforce
recently acquired a company called mulesoft to help salesforce's various tools share data
more effectively salesforce announced on december 1st that it's going to buy slack for 27.7 billion
the goal is to integrate slack into their existing products and to take on microsoft
teams with the start of the pandemic companies had to rush to increase their employees ability
to work remotely we've seen companies like zoom get a big boost from this on the other hand slack
continues to add customers but it wasn't a huge explosion in demand microsoft teams has been
the favorite for many companies and i think part of that is because the integration with the rest
of office 365. if salesforce can integrate slack into their crm products i think this will be a
great value add i don't think this acquisition is a huge game changer for salesforce but i do think
some type of robust communications capability is something their product needs whether they built
it or bought one one additional benefit to the slack purchase is you don't have to spend time
developing your own and you get an existing paying user base so let's take a look at the
business performance to find out what salesforce is worth so looking at the revenue and net income
chart we can see very consistent revenue growth but very low net income margins if we look at a
chart showing revenue growth from 2005 on we can see they've had pretty consistent revenue growth
between 25 to 20 percent for at least the past five years looking at net income again we can
see that they basically broken even on every year except for 2019 and the current 2021 fiscal year
now we see this huge revenue growth but hardly see any profitability so where is all the revenue
going the full year for 2020 brought in 17 billion dollars in revenue but only 126 million in net
income the cost of revenue which are the direct costs of making their goods and delivering them to
their customers was only four billion dollars so this leaves us with a gross profit of 12.8 billion
dollars when we look at their operating expenses they spent 2.7 billion in research and development
7.9 billion in marketing and sales and 1.7 billion in general and administrative expenses they also
had 166 million dollar loss on a settlement with their salesforce.org purchase we can see that over
half of their gross profits are spent on marketing and sales personally i don't think this is too big
of a deal their 2020 annual report said that they had to increase the number of employees
on their sales and marketing team by 36 percent this matches with a 30 spending increase between
2019 and 2020. considering the incredible revenue growth that we've seen with salesforce this seems
to be paying off personally i'd much rather see cash used to grow the business than spending less
and taking larger net income to grow their cash pile this is assuming though that they already
have enough cash in reserve the balance sheet shows 55 billion dollars in assets and 21 billion
in liabilities which gives us 34 billion dollars in equity they only have two billion dollars in
debt so overall we do see a very healthy balance sheet with their debt only five percent of their
equity one concern i do see is they reported 16 billion dollars in current assets which
is cash payments that they're owed in the next year their current liabilities are 15 billion
now current liabilities are debts that they'll owe within the next year usually a high amount of
current assets to current liabilities also called the current ratio is most ideal salesforce has a
very tight current ratio at just barely over one percent going backwards a couple of years it seems
that this is a pretty consistent trend for them in 2018 and 2017 they actually had a current ratio of
less than one as long as salesforce continues to grow like they have this shouldn't be a big issue
they did report 4 billion in cash in the most recent quarter and they have almost
no debt so they would have a ways to go before this becomes a significant issue so let's take
a look at the valuation for salesforce but before i do that if you found this video helpful so far
please take a second to scroll down and hit the thumbs up button i would be really appreciative
of that these videos take about 15 hours for me to produce between researching and editing and i try
pretty hard to make sure that these videos are as informative as possible without getting confusing
okay now back to the valuation now let's look back at the revenue and net income graph
and include the forecasted revenue for the rest of the 2021 fiscal year and 2022 forecast we can
see that revenue growth is projected to continue but net income is supposed to decline by about 800
million dollars this year is currently forecasted to earn almost 20 profit margin while 2022 is
projected to have 13 profit margins i'm more interested in salesforce growing their revenue
than their net income most of their expenses are towards things to grow the business and not the
cost of making their products or debt repayments if they need to increase profit margins these
things could be more easily reduced than cutting costs to make the products and to reduce debt so
i'm going to use a growth rate of 23 this gives us a fair p e value of 74. if you want to see how i
get these numbers click the link in the top right of this video to see my video on that the 2021
trailing 12 months earnings per share is 3.86 so this comes out to a valuation of
286 dollars which means about 27 upside for the trailing earnings if we look forward to
the 2022 estimates the earnings per share is projected to fall to 3.74 cents this brings the
forward valuation down to 277 dollars which is still 23 higher than today's share price of 225
so my rating for salesforce stock is a strong buy i think they have very consistent growth i also
think their finances show a very well-managed business that funds its growth entirely with
money that they've already made i also think the future is very bright for crm products
in general with a likely shift to more remote work now as a quick disclaimer i do own stock
in salesforce i actually didn't own any until i started doing research for this video because i
never realized how impressive of a business they are i have no plans to sell anytime soon and if
the prices stay low for the next couple of months i'm going to continue buying now if this video was
helpful for you and you want to see more like it please hit the subscribe button and the bell
notification so you know whenever i upload a new video and as always thanks for watching