I conclude Salesforce.com (NYSE: CRM) is a cash-rich software value investment that Mr. Market overprices.
To explain, Salesforce shares were trading at $158.28 on 30 October 2019. In addition, Salesforce had $3.51 billion in short-term investments and $2.532 billion in cash and equivalents on 31 July 2019. Consequently Salesforce.com had $6.042 billion in liquid assets.
However, Oracle Corp (NYSE: ORC) had $31.083 billion in cash and equivalents and $4.621 billion in short term-investments on 31 August 2019. Hence, Oracle had $35.704 billion in liquid assets but its shares were trading at $54.85 on 30 October 2019.
Therefore, I consider Salesforce.com overpriced because its cash and margin of safety are too low. To explain, I think $6.042 billion in cash is too low a margin of safety when a direct competitor; Oracle, has $35.704 billion in the bank.
An even greater menace is Microsoft (NASDAQ: MSFT) which had $136.636 billion in cash and equivalents on 30 September 2019. I think Mr. Market fairly priced Microsoft at $144.61 on 30 October 2019.
Salesforce has a lot of Value
However, I think Salesforce.com still has a lot of value because of its ecosystem.
For example, Salesforce.com had 19.6% of the customer relationship management (CRM) software market on 29 May 2018, Department of Numbers estimates. For non-salespeople, CRM is the software that connects businesses to customers. Hence, CRM is critical to the success of many businesses.
In addition, Salesforce.com is a major player in the cloud business. Department of Numbers estimates 34% of Salesforce’s revenue came from its Sales Cloud solution in May 2018. In addition, the Service Cloud generated 30% of Salesforce’s revenues came from the Service Cloud and 21% came from the App cloud in May 2018.
Does Microsoft Own the Business Cloud?
Therefore, I estimate 85% of Salesforce’s revenue came from the Clouds in May 2018. Consequently, I think the cloud dependence makes Microsoft the biggest threat to Salesforce.com.
For instance, the revenue from Microsoft’s Azure Cloud Intelligent Cloud grew by 27% in the quarter ending on 31 September 2019, TechCrunch estimates. In addition, revenue from Microsoft’s Azure cloud solution grew by 59% in the same period.
However, trends in the business favor both Microsoft and Salesforce.com. For instance, the infrastructure as a service (IaaS) cloud grew by 31.3% in 2018, Gartner estimates. Gartner names Microsoft as the number two vendor in the market after Amazon (NASDAQ: AMZN).
Could Competitors squeeze Salesforce.com out of the Cloud?
In addition, Gartner estimates the top five IaaS providers; Amazon, Microsoft, Alibaba (NYSE: BABA), Alphabet (NASDAQ: GOOG), and IBM (NYSE: IBM), accounted for 77% of the 2018 global IaaS market. However, I think there is room for smaller vendors.
Unfortunately, smaller vendors will need to be far more competitive. Gartner estimates the Top Five IaaS vendor’s share grew from 73% in 2017 to 77% in 2018. Hence, the Big Five could squeeze smaller players like Salesforce.com and Oracle out of the cloud market.
In 2018, Gartner estimates Amazon’s share of the public IaaS cloud market grew by 26.8%, Alibaba’s share of the public IaaS market grew by 92.6%, Microsoft’s share of the IaaS market grew by 60.9%, Alphabet’s (NASDAQ: GOOGL) public IaaS cloud share grew by 60.2%, and IBM’s IaaS public share grew by 24.7%.
Meanwhile, all other providers combined had a growth rate of 11.1% in 2018. In particular, I have to wonder how Salesforce.com can compete with companies such as Alphabet; Google, which had $121.056 billion in cash and short-term investments on 30 June 2019.
Is Salesforce.com making Money?
Contrarians; however, will say Salesforce.com (NYSE: CRM) is a value investment because it makes money in the face of all that competition. Yet, Salesforce.com is an obscure company most people have never heard of.
Notably, Saleforce.com reported a gross profit of $3.03 billion on revenues of $3.997 billion on 31 July 2019. Importantly, Salesforce.com reported a revenue growth rate of 21.82% on 31 July 2019.
However, Salesforce.com reported an operating income of $55 million and a net income of $91 million on 31 July 2019. Hence, Salesforce.com makes some money from its growing business.
The Risk at Salesforce.com
In addition, Salesforce.com reports an operating cash flow of $436 million and a free cash flow of $258 million on 31 July 2019. Thus, Salesforce.com’s business makes some money, but it is not a money machine like Oracle, Alphabet, or Microsoft.
Therefore, you could a serious risk by buying Salesforce.com (NYSE: CRM). This stock has a low of margin of safety and Mr. Market overprices it.
In addition, Dividend.com reports Salesforce pays no dividend. Hence, CRM is not a good stock for average people. In contrast, Microsoft plans a 51₵ dividend for 20 November 2019 and Oracle paid a 24₵ dividend on 9 October 2019.
In conclusion, I think there are better cloud and software stocks than Salesforce.com out there. I believe the high price and lack of a dividend make CRM a poor investment.