Over the past six months, Salesforce’s shares (currently trading at $195.64) have posted a disappointing 19.8% loss, well below the S&P 500’s 5.7% gain. This might have investors contemplating their next move.
Is now the time to buy Salesforce, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Salesforce Not Exciting?
Even though the stock has become cheaper, we're cautious about Salesforce. Here are three reasons why CRM doesn't excite us and a stock we'd rather own.
1. Weak ARR Points to Soft Demand
While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.
Salesforce’s ARR came in at $42.7 billion in Q4, and over the last four quarters, its year-on-year growth averaged 10.3%. This performance was underwhelming and suggests that increasing competition is causing challenges in securing longer-term commitments. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Salesforce’s revenue to rise by 11.1%. While this projection implies its newer products and services will fuel better top-line performance, it is still below average for the sector.
3. Operating Margin Rising, Profits Up
Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.
Analyzing the trend in its profitability, Salesforce’s operating margin rose by 1 percentage points over the last two years, as its sales growth gave it operating leverage. Its operating margin for the trailing 12 months was 20.1%.
Final Judgment
Salesforce isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 3.9× forward price-to-sales (or $195.64 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at the most dominant software business in the world.
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