Over the past six months, Salesforce has been a great trade, beating the S&P 500 by 19.8%. Its stock price has climbed to $239.80, representing a healthy 28.7% increase. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Salesforce, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Salesforce Not Exciting?
We’re happy investors have made money, but we don’t have much confidence in Salesforce. Here are three reasons you should be careful with CRM, 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 $9.77 billion in Q2, and over the last four quarters, its year-on-year growth averaged 11.2%. 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 10.4%, close to its 13.3% annualized growth for the past five years. This projection doesn’t excite us and suggests its newer products and services will not accelerate its top-line performance yet.
3. Operating Margin in Limbo
While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.
Looking at the trend in its profitability, Salesforce’s operating margin might have fluctuated slightly but has generally stayed the same over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 19.9%.
Final Judgment
Salesforce’s business quality ultimately falls short of our standards. With its shares outperforming the market lately, the stock trades at 4.2× forward price-to-sales (or $239.80 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We’re pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at the most entrenched endpoint security platform on the market.
Stocks We Like More Than Salesforce
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