Company Overview: Salesforce.com, Inc. (NYSE: CRM) is a global leader in customer relationship management (CRM) technology, connecting businesses and their customers. Its Customer 360 platform provides a single source of truth by linking customer data across systems, apps, and devices, enabling companies to sell, service, and perform commerce anywhere. It also provides Service Cloud for customer support, Marketing Cloud for digital marketing campaigns, Commerce Cloud as an e-commerce engine, and other products such as MuleSoft for data integration.

CRM Details

Key Takeaways from Q3FY22 (ended October 31, 2021)

• Growth in Revenues: The company's total revenues in Q3FY22 (ended October 31, 2021) were USD 6.86 billion, a 26.65% rise from USD 5.42 billion in Q3FY21, owing to volume-driven increases from new business and pricing improvements.
• Drop in Bottomline: Net income was USD 468 million in Q3FY22, compared to USD 1.08 billion in Q3FY21, representing a diluted EPS of USD 0.47.
• Improvement in Headcount: CRM has raised its headcount by 37% since October 31, 2020, in response to rising consumer demand for services, and the recent acquisition of Slack has also contributed to this increase.

Revenues & Gross Profit Key Highlights; Analysis by Kalkine Group

Recent Developments

• On January 13, 2022, CRM announced that it would integrate PayPal, a leading financial technology business, into its checkout experience with a simple, click-based setup. It also announced a partnership with ISV partner XCentium, an independent software vendor, to help its wholesale apparel and fashion operations.
• CRM issued its 2021 Holiday Shopping Report on January 12, 2022, which analyses shopping data from over one billion shoppers on the Salesforce Customer 360 platform. Consumers spent USD 1.14 trillion online globally and USD 257 billion in the United States, compared to USD 1.10 trillion and USD 236 billion in 2020, respectively.
• On December 09, 2021, IBM, a leading worldwide hybrid cloud, artificial intelligence (AI) and business services provider, and MuleSoft, a CRM product, announced a global partnership. IBM and MuleSoft want to expand integrations and solutions based on the IBM Z product range to support financial services and other joint customers.

Segment Wise Results Q3FY22

• Subscription & Support – This segment accounted for 92.95 % of the total revenue in Q3FY22, reported YoY growth of 25.45% to USD 6.38 billion, from USD 5.09 billion in Q3FY21.
• Professional Services and Other – This segment accounted for 7.05% revenue in Q3FY22, growing 44.91% YoY to USD 484 million from USD 334 million in Q3FY21, owing to increased demand for services from a more significant number of customers, as well as revenues from the Acumen Solutions, Inc. (Acumen) acquisition in February 2021.

Balance Sheet & Liquidity Position

• Decline in Cash Balance: The company exited Q3FY22 with a cash balance (including marketing securities) of USD 9.39 billion, down 21.52% from USD 11.97 billion as of FY21 end.
• Boost in Cashflow from Operations: Net operating cash inflow during 9MFY22 was USD 4.02 billion from USD 2.63 billion during 9MFY21.
• Increase in Debt Profile: As of October 31, 2021, CRM total outstanding debt was USD 10.59 billion from USD 2.67 billion reported at the end of FY21.

Key Metrics: CRM's EBITDA and net margins in FY21 were 16.1% and 19.3%, up from 15.2% and 0.8% in FY20, respectively. Its Debt/Equity ratio has been improved to 0.07x in FY21, from 0.09x in FY20.

Profitability Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 35.54% of the total shareholding, while the top 4 constitute the maximum holding. The Vanguard Group, Inc. and Fidelity Management & Research Company LLC, hold the maximum stake in the company at 7.52% and 6.96%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group

Risk Analysis

• Dependence on Third-Parties: Customers are currently served by third-party data centre hosting facilities and cloud computing platform providers in the United States and other countries. To provide its services, it also relies on computer hardware purchased or leased from third parties and software licensed from third parties. Any disruption or damage to, or failure of, the company's systems in general, including the systems of its third-party platform providers, could result in service outages and eventually harm the company's revenues and cash flows.
• Currency Fluctuation Risk: CRM operates in several worldwide markets, including the Americas, Europe, and the Asia Pacific, and most of its transactions are handled in foreign currencies. It is exposed to foreign currency risk due to doing business and investing in other currencies.
• Product Concentration Risk: Subscriptions to its CRM corporate cloud computing application services account for a sizable amount of the company's revenue, which it expects to continue for the foreseeable future. Its business may suffer if it cannot develop new features for existing or new services that keep up with rapid technological developments.

Outlook

• Looking ahead, CRM forecasts its Q4FY22 revenues to range between USD 7.224 and 7.234 billion, representing a 24% YoY increase. It also predicts Q4FY22 GAAP Earnings (loss) per share (EPS) to be in the range of USD (0.24) – (0.23) and Non-GAAP EPS to be in the range of USD 0.72 – 0.73.
• Revenues for FY22 are expected to be in the USD 26.39 – 26.40 billion range, representing a 24% growth YoY. CRM expects its GAAP operating margin to be around 1.8%. It also expects FY22 GAAP EPS to be in the range of USD 1.28 – 1.29.
• The company also projected its FY23 revenues to be around USD 31.7 – 31.8 billion, along with a GAAP operating margin of around 3.0 – 3.5%.

Valuation Methodology: Price/Earnings Per Share Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock has fallen 22.00% in the past three months. The stock is currently leaning towards the lower band of its 52-week range of USD 201.51 to USD 311.75. We have valued the stock using the Price/Earnings-based illustrative relative valuation method and arrived at a target price with an upside of low twenties (in percentage terms). We believe that the company can trade at a premium compared to its peer's average, considering its market dominance in the application software space, robust profitability margins, and global market presence. We have taken peers like Adobe, Inc. (NASDAQ: ADBE), SAP SE (NYSE: SAP), and others. Considering the robust top-line performance, proven track record, strong profitability margins, associated risks, and current valuation, we give a "Buy" recommendation on the stock at the closing price of USD 226.27, up ~0.09%, as of January 19, 2022.

CRM Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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