Salesforce Stock Is Undervalued

Salesforce stock (NYSE: CRM) has gained 67% YTD, as compared to the 17% rise in the S&P500 over the same period. Further, at its current price of $221 per share, it is trading 8% below its fair value of $242 – Trefis’ estimate for Salesforce’s valuation.

Interestingly, Salesforce
stock had a Sharpe Ratio of 0.6 since early 2017, which is at par with the S&P 500 Index over the same period. This compares with the Sharpe of 1.31 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

The company outperformed the street estimates in the second quarter of FY 2024 (FY Feb-Jan), with revenues increasing by 11% y-o-y to $8.6 billion. It was driven by a 12% rise in the subscription & support revenues and a 3% increase in the professional services & other revenues. The subscription & support revenues benefited from growth in all the sub-categories – sales cloud (up 12%), service cloud (12%), platform & other (11%), marketing & commerce cloud (10%), and data (16%). On the cost front, total expenses as a % of revenues witnessed a favorable drop in the quarter. Overall, the net income jumped from $68 million to $1.27 billion.

The company’s top line grew 11% y-o-y to $16.85 billion in the first half of FY 2024. It was mainly driven by a 12% growth in the subscription & support segment, followed by a 6% rise in the professional services & other revenues. Further, income from operations as a % of revenues improved from 1.4% to 11.2% over the same period. It resulted in a net income of $1.47 billion, as compared to the figure of $96 million in the year-ago period.

Moving forward, the firm issued revenue and earnings guidance for Q3 FY2024 – revenue ($8.7-$8.72 billion) and GAAP EPS ($1.02-$1.03). Overall, Salesforce’s revenues are forecast to touch $34.66 billion in FY2024. Additionally, CRM’s revenue per share is likely to increase to $33.75. This coupled with a P/S multiple of just above 7x will lead to a valuation of $242.

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