Stock Deep Dive - Salesforce: Bringing Companies and Customers Together
A deep dive into the largest CRM company in the world
Dear reader,
Welcome to this new edition of Summit Stocks Deep Dives.
In today’s edition, you’ll learn about Salesforce, a leading provider of customer relationship management (CRM) technology.
The company’s offerings span sales, service, marketing, commerce, collaboration, integration, AI, analytics, automation, and more. Sounds a bit vague, no? I’ll explain everything in detail below!
With revenues of over $36 billion and free cash flow north of $11 billion, this powerhouse of a company is one worth investigating.
What You’ll Read Today
Salesforce’s History
Salesforce’s Business
Products
Moat
Key Financials
Insiders
Risks, Valuation, Conclusion
Salesforce’s History
Before becoming a global leader in cloud-based software, Salesforce’s beginnings were much humbler. Founded in 1999 by Marc Benioff, Parker Harris, Frank Dominguez, and Dave Moellenhoff, Salesforce began in a one-bedroom San Francisco apartment. The founders aimed to create “A World-Class Internet Company for Sales Force Automation”, revolutionizing the industry by delivering software through the internet—a novel idea at the time.
Indeed, at a time when software was sold as costly on-premise solutions, Salesforce introduced cloud-based software, highlighting its scalability and affordability. This also popularized Software-as-a-Service (SaaS), a purchasing model where users subscribe to a service and access it via the internet instead of purchasing and installing software on individual devices.
By the end of Salesforce’s first year, the company had grown to 40 employees and was forced to move into a larger office.
In 2000, the Salesforce product officially launched at an event themed “The End of Software”, positioning itself as a revolutionary alternative to traditional on-premise software companies.
Salesforce offered businesses a suite of sales management tools for just $50 per month per user, a fraction of the cost of traditional software solutions, which could easily cost hundreds of thousands dollars. The sales management tools included features for account monitoring, opportunity tracking, sales forecasting, and report generation. Importantly, the website was supposedly as easy to use as Amazon.com.
Benioff became CEO in 2001, and in that same year, Salesforce surpassed 3,000 customers. Two years later, Salesforce hosted its first Dreamforce conference. Dreamforce would become an annual hallmark event, where the latest features and road-map are shown, bringing together partners, developers, and users.
The company went public in 2004, raising $110 million at $11 per share, and in the following year, Salesforce introduced AppExchange, a marketplace for business applications. By that time, the company had more than 20,000 customers.
In 2008, Salesforce expanded its customization capabilities with Force.com, enabling customers to build apps with minimal coding.
The following year, Salesforce launched Service Cloud, a customer service application complementary to its existing suite of products.
Salesforce further strengthened its portfolio with key acquisitions aimed at building its Marketing Cloud:
Radian6 (2011): A social media monitoring platform that allowed companies to track online conversations about their brands and competitors, offering insights for marketing and customer engagement.
Buddy Media (2012): A platform focused on social media marketing.
ExactTarget (2012): A leading cloud-based marketing platform, trusted by major brands like Coca-Cola, Gap, and Nike.
Salesforce later ventured into physical and digital commerce with the 2016 acquisition of Demandware, which became the Commerce Cloud.
By 2018, Salesforce offered an all-in-one solution with Customer 360, integrating sales, service, marketing, commerce, IT, and analytics into a unified platform. In that same year, Salesforce acquired MuleSoft to enhance its integration solutions and a year later Tableau for its analytics offerings. Finally, in 2021, Salesforce acquired Slack, a collaboration and messaging platform designed for workplace communication and productivity.
Under Benioff’s leadership, Salesforce has grown into the world’s leading CRM platform, serving over 150,000 customers, including major names like Walmart, Amazon, Spotify, and L’Oréal. Its solutions are trusted by more than 90% of Fortune 500 companies, a testament to its far-reaching impact and innovation-driven legacy.
Salesforce’s Business
Products
At the core of Salesforce’s platform is Customer 360, which unites sales, service, marketing, commerce, and IT teams, providing a unified view of customer data. These offerings are designed to be flexible, scalable and easy to use, all available through subscription models.
The company segments its business into five offerings:
Sales
Sales Cloud, Salesforce’s flagship product, is designed to help businesses enhance sales processes, increase efficiency, and drive revenue growth. It allows customers to store and manage customer data, track leads, forecast sales, automate workflows, and generate quotes, contracts and invoices. The Sales Cloud has been recognized as a Leader for the 16th consecutive year—and many customers begin their partnership with Salesforce here.
The Sales segment generated $7.6 billion in revenue in fiscal 2024—Salesforce’s fiscal years end in January.
Service
Service Cloud helps businesses integrate all their customer service needs onto one platform. It enables customer service agents to engage with customers anytime and across multiple channels—phone, email, self-service portals, social media, and more. This results in improved productivity, faster case resolution, and better customer satisfaction.
The Service segment is Salesforce’s largest segment revenue wise, having generated $8.2 billion in fiscal 2024.
Platform and Other
The Platform offering serves as the backbone for Salesforce’s various products, providing the tools and infrastructure necessary for their functionality. Customers can leverage the Platform to build custom applications, tailor existing offerings, or create entirely custom solutions. The AppExchange is part of this offering, where third-party developers sell customizable apps that integrate with Salesforce’s products. Salesforce earns revenue from the fees associated with these app sales, while the Platform itself functions as a PaaS.
The Platform and Other segment also includes Slack, a recently acquired collaboration and messaging platform for workplace communication and productivity. Slack integrates deeply into the Customer 360 ecosystem, providing no-code workflow automation and AI technology to help teams across divisions work together seamlessly.
The segment contributed $6.6 billion to revenue in fiscal 2024.
Marketing and Commerce
The Marketing Cloud helps companies personalize, automate, and optimize customer marketing journeys across channels like email, mobile, social media, web and connected products. It enables organizations to create personalized customer journeys, manage ads, and gain insights into marketing performance.
The Commerce Cloud streamlines the shopping experience across all customer touchpoints, both online and offline. It personalizes shopping experiences with product recommendations and targeted promotions, while also providing tools for inventory management and order fulfillment.
The segment generated $4.9 billion in revenue in fiscal 2024.
Integration and Analytics
This segment includes two key products:
MuleSoft is a software platform specializing in integration and API management, helping customers connect applications, data, and devices across various systems. With MuleSoft, customers can create a cohesive system by integrating different software applications and facilitating workflows between platforms like marketing, sales, and customer service.
For instance, consider an e-commerce business using Shopify for its online store, Salesforce for marketing and customer service, SAP for enterprise resource planning (ERP), and a Point-of-Sale (POS) system for its pop-up stores. This gets messy quick: without integration, data across systems can become fragmented, leading to discrepancies in customer and inventory data and creating operational challenges. MuleSoft solves this problem by linking these systems, creating a unified platform that ensures accurate, consistent data across all touchpoints, providing a single source of truth for the business.
Tableau is a leading data visualization tool that helps businesses analyze data and make data-drive decisions. Tableau connects to multiple data sources, including Salesforce, Excel, AWS, and Google Analytics, to create interactive dashboards and charts. It provides powerful tools for statistical analysis, forecasting, and trend identification, empowering businesses to turn data into actionable insights.
The Integration and Analytics segment contributed $5.2 billion to revenue in fiscal 2024.
Salesforce provides a comprehensive ecosystem of business solutions, spanning marketing, sales, customer service, workplace communication, integration, and more. As a one-stop-shop, Salesforce enables businesses to access a wide range of tools—and the more Salesforce products and services customers use, the richer and more comprehensive their Customer 360 platform becomes, creating a unified, data-driven approach to managing customer relationships.
Moat
Salesforce boasts several key strengths that form the foundation of its economic moat.
Switching Costs
Salesforce’s ecosystem creates substantial switching costs for its customers. While businesses can use a standalone product like Sales Cloud or Service Cloud, the true power of Salesforce lies in the seamless integration of its offerings. The products are highly complementary and work better together, naturally driving cross-selling within the ecosystem.
Source: Salesforce Investor Relations. Customers using multiple Salesforce products generate significantly more revenue and have a lower churn. As customers adopt more Salesforce products, they become increasingly dependent on the ecosystem, making it harder to leave. This lock-in stems from the widespread touchpoints Salesforce has across an organization, as well as its mission-critical role in operations. Indeed, for many customers, Salesforce is present in basically every department, ranging from marketing to customer service to workplace communication. Switching to alternative software is both time-intensive and costly, requiring retraining employees, managing operational risks, and dealing with productivity loss during the transition.
A strong indicator of these switching costs is Salesforce’s churn rate—the annual reduction or loss in the value of customer contracts—which has ranged between 7-10% since fiscal 2019. Salesforce’s relatively low churn rate reflects not only high switching costs but also strong customer satisfaction.
Network Effects
Some segments of Salesforce, especially the Platform, enjoy network effects. Customization and the ability to create applications are important factors within Salesforce. The AppExchange largely facilitates this. As more businesses join the ecosystem, developers are incentivized to create more apps, resulting in more businesses being attracted to Salesforce, creating a self-reinforcing loop.
Additionally, a large network of consultants has built practices around Salesforce, with third-party organizations offering a range of consultancy services to both existing and potential Salesforce customers. These consultants help businesses implement, customize, and optimize Salesforce solutions, streamlining the adoption process.
Intangible Assets
Salesforce’s brand is a powerful competitive advantage. Synonymous with CRM, the Salesforce brand instills trust and reliability, important factors given how mission-critical its solutions are for businesses.
Moreover, the company’s Dreamforce conference is a major driver of its brand strength. As one of the most anticipated tech events globally, it not only attracts significant attention but also fosters a sense of community and belonging among customers, partners, and stakeholders. This helps Salesforce maintain customer loyalty and enhance its appeal as a trusted industry leader.
A combination of high switching costs, network effects, and brand strength provide Salesforce with a wide moat. The company is so rooted in customers’ operations that I don’t see Salesforce disappear anytime soon.
Key Financials
Salesforce has built an outstanding track record of consistent and high revenue growth—revenue hasn’t declined once over the past decade.
The compound annual growth rates (CAGR) for revenue vary by period:
10-year: 24%
5-year: 21.3%
3-year: 17.9%
1-year: 11.2%
While growth remains impressive, there’s a noticeable slowdown, largely driven by the law of large numbers. As Salesforce scales, sustaining high growth rates becomes increasingly difficult.
Recent growth has been led by the Integration and Analytics segment, with other segments also delivering strong, though relatively slower, growth.
CAGR for each segment (since 2019, except Integration and Analytics, since 2020):
Sales: 13.4%
Service: 17.9%
Platform and Other: 18.3%
Marketing and Commerce: 20.9%
Integration and Analytics: 32.5%
A few remarks: While all segments have slowed down, Marketing and Commerce has seen the sharpest fall in revenue growth, growing by ‘only’ 9% in fiscal 2024. Integration and Analytics remained strong, achieving 20% year-over-year growth in fiscal 2024, while all other segments, except Marketing and Commerce, grew at low double-digit rates.
Future revenue growth should be supported by a number of pillars, including but not limited to:
Expanding CRM Market: According to Gartner, the CRM market's total addressable market will reach nearly $300 billion by 2026, with a 13% CAGR from 2022. Salesforce should also continue to benefit from the ongoing shift toward cloud computing.
Growing End Markets: Salesforce’s customer base is extremely diverse, ranging from consumer goods to healthcare and education. As these markets grow, Salesforce stands to benefit as customers adopt more of its products.
International Expansion: Two-thirds of Salesforce's revenue currently comes from the Americas, leaving significant growth potential in Europe and Asia Pacific, where revenues are growing in line with—and in recent years faster than—the Americas.
Salesforce is entering a new phase focused on profitability.
While past operating income was unimpressive, fiscal 2024 saw a significant improvement due to sustained revenue growth and disciplined cost management.
Marketing expenses, Salesforce’s largest operating cost, were kept roughly flat. As a percentage of sales, these expenses dropped from 45% in fiscal 2022 to 37% in fiscal 2024. At the same time, other operating expenses and cost of goods sold have also been kept under control.
Free cash flow has also expanded substantially, similar to operating income.
Historically, free cash flow has been volatile, as Salesforce prioritized revenue growth over profit and cash flow. However, the company is now entering a new phase, further supported by the introduction of a recurring dividend this year and significant share buybacks, signaling a stronger focus on shareholder returns.
Salesforce’s Return on Invested Capital (ROIC) has historically been low due to its emphasis on growth over profitability. However, with rising profits, ROIC is improving, particularly when excluding goodwill. While goodwill shouldn’t be ignored in Salesforce’s case—the company regularly acquires companies—it does show how effectively Salesforce operates with its core operating assets.
I’m expecting ROIC to further increase as profits continue to rise, outpacing invested capital.
As of July 31, 2024, Salesforce’s balance sheet is sound. The company holds $12.6 billion in cash and equivalents against $8.4 billion in debt, meaning net debt is negative. Moreover, the company’s interest cover ratio in fiscal 2024 equals 20x, which means interest expenses are only a minor part of total expenses.
Overall, Salesforce’s financials are very solid. Looking ahead, this is a story of moderate revenue growth and rising profitability, with metrics like ROIC expected to improve further.
Insiders
Salesforce is still led by Marc Benioff, the co-founder and first CEO of the company. Born in 1964, he should still have some years left in the tank before withdrawing. Benioff is a key person within Salesforce, and it’ll be difficult to replace him.
As of the latest proxy report, Benioff holds 24,038,731 shares, representing a 2.5% stake in the company, valued at around $8.07 billion. This sizable stake aligns his interests with those of shareholders.
Other notable insiders include:
Parker Harris, Chief Technology Officer of Slack and Salesforce co-founder, who holds 2,493,809 shares.
Amy Weaver, Chief Financial Officer, who holds 70,722 shares.
Mason Morfit, Director, who holds 3,487,972 shares
Risks, Valuation, Conclusion
To wrap up today’s article, let’s review the specific risks for Salesforce shareholders and the current valuation of the stock.
Key risks for Salesforce shareholders include:
Intense Competition: The CRM industry is highly fragmented and competitive. Major players other than Salesforce include Microsoft, Oracle, Adobe, and SAP. The market is also inhabited by countless of smaller firms. Salesforce, however, is the clear market leader in the industry, and a fragmented market also provides the opportunity for consolidation, which Salesforce will surely benefit from.
Technological Disruption: Salesforce stock had underperformed the broader market year-to-date until recently, mainly due to fears of AI being able to replace Salesforce’s offerings. It seems, however, that Salesforce is poised to benefit from AI, with the new Agentforce product being proof.
Leadership Turnover: Marc Benioff is a key person within the company, and his inevitable departure may harm Salesforce in the future.
Salesforce currently trades at a trailing P/E ratio of 58 and a trailing adjusted free cash flow yield of 2.5%. Given that the company is only recently becoming profitable, comparing these metrics to historical valuations is senseless. While a 2.5% free cash flow yield isn’t excessive, it’s certainly not cheap either.
Therefore, I won’t be adding to my Salesforce position at these levels. I would be happy to add Salesforce against a better price, because it’s simply a phenomenal company with a great outlook.
Thank you for reading, and I hope this gave you valuable insights into Salesforce. Let me know if you own the stock or if you’re considering taking the plunge!
In case you missed it:
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Disclaimer: the information provided is for informational purposes only and should not be considered as financial advice. I am not a financial advisor, and nothing on this platform should be construed as personalized financial advice. All investment decisions should be made based on your own research.
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