Coverage of the shares of this enterprise cloud computing company were recently initiated at Mizuho, with a ‘Buy’ rating, and at Stephens & Co. and Atlantic Equities, with an ‘Overweight’ rating. Additionally, the shares were upgraded at Pivotal Research, to ‘Buy’.
salesforce.com (CRM)
from Canaccord Genuity Research
In this quarter, salesforce.com, inc. (CRM) faced a “difficult” comparisons for Total RPO, as the year-ago period saw eight of the firm’s 10 biggest renewals ever. For those who value companies based on fundamentals, Salesforce’s fundamentals remained strong in the quarter, and if you use management’s opinion of its outlook, this year looks quite good as well. Long term, the company set a target to double revenue again to $26-28B by F2023/C2022, which given that Salesforce’s FCF margins still have room to move higher, implies more than a double in cash flow.
The point here is that we disagree with those who suggest Salesforce’s fundamentals have, are, or will deteriorate. This is a company with the clear number 1 market share in Marketing Tech, and while we believe both Microsoft and Adobe will become more credible competitors, this is not a zero-sum market as budget dollars are moving to marketing, and there is plenty of market share to be had from what’s left of IBM’s MarTech foray, SAP’s Qualtrics distracted effort, and Oracle’s amalgam of often expensive piece parts.
The challenge, of course, is that too many investors decided software was the only sector worth owning. While our checks of a few hundred companies, most of whom are private, show about 70% are growing respectably, we have said for a few weeks now that public stock valuations are right back up to their scarily high levels of summer and fall of 2018.
The fact is, we actually hope software stocks peel a point or two off of the current 8.6x NTM EV/R (next twelve months enterprise value/revenue). But our wishes are irrelevant, and what matters is that in every market other than an explosive rally, quality stocks like CRM tend to outperform—and that’s why we have called this stock a core holding. BUY, with our target moving up to $175.
Salesforce reported FQ4 revenue and non-GAAP EPS of $3.60B and $0.70, which were respectively $42M and $0.15 ahead of our estimates (about $0.13 of the EPS beat was driven by below-the-line upside). These results imply 26% revenue growth and 16.5% operating margins. Current RPO (remaining performance obligation, similar to deferred revenue) ended the period at $11.9M, slightly ahead of our estimate and up 24% y-o-y. FCF (free cash flow) came in at $1.16B in the quarter, ahead of our $943M estimate, which brought full year F2019 FCF margins to 21.1%. Looking ahead, CRM guided for current RPO to increase by 24% in FQ1, which is ahead of our 23% estimate, and full-year F2020 guidance inched marginally higher, essentially bracketing consensus, implying 21% revenue growth and about 125-150 bps of operating margin expansion.
We are increasing our price target by $10 to $175, which is based on a 7.3x EV/R and 32x EV/FCF multiple applied to our updated F2021/C2020E estimates of $19.04B and $4.33B plus approximately $5.0B in prospective net cash, and assumes ~820M fully diluted shares outstanding.
Richard Davis, CFA, David Hynes Jr., and Luke Morison, Canaccord Genuity Research,
www.canaccordgenuity.com, March 6, 2019