Summary
- Salesforce has a dominant position in customer relationship management (CRM).
- Strong geographic and industry diversification gives the company numerous revenue pipeline opportunities.
- The Slack acquisition has given Salesforce a strong foothold in the growing communications market, where the company has previously not had a major position.
- We has identified an opportunity in Salesforce through our proprietary software.
This article was written by Risk Research and Noah Riley.
Tech companies have had a phenomenal year and Salesforce is no different. Its shares are up 100% since the lows experienced at the start of March. There are good reasons for this. The increasing digitization of business has contributed to the proliferation of data builds which, in turn, has increased demand for Salesforce’s services. The shares trade at a fairly high P/E of circa 50x however there is good reason for this considering company performance and the extensive growth runway in front of Salesforce.
Because of its stock price weakness over the last four months, Salesforce is currently the largest position in the Risk Research portfolio. Somewhat oversimplified, we are buyers of low-debt growth on weakness.
Growth Stock Selection Process
Once a month, Risk Research software produces detailed reports on the ten largest positions held by the ten growth portfolio managers with the strongest ten-year records. In addition, each month, our software scrutinizes the financial statements of all public companies looking for characteristics that have, in the past, indicated the potential to generate returns in the top one percent of all public companies. These characteristics include the rare combination of rapidly increasing sales and improving balance sheet trends. Very few companies are able to grow without significant capital expenditures and new debt.
In the most recent reports, 157 companies were identified as being in one of the two groups – Master Investor Holdings and SuperGrowth MultiBaggers – including Salesforce which qualifies for both groups. Because most of these companies trade at substantial premiums to our estimated intrinsic value most of the time, and because focusing on intrinsic value would cause us to avoid the companies that are, in fact, the best-performing companies in our portfolio, we use an AI algorithm (described below) to identify entry prices. We expect that, in the next few years, professional investors will rely more and more on AI in the management of their portfolios.
What does Salesforce do?
Since its founding in 1999, Salesforce has become the number one global application for CRM (Customer Relationship Management) with over 150,000 customers worldwide. Salesforce’s reputation is strong and it is viewed as ‘the gold standard’ of CRM software. This gives it a strong market position and the company has maintained and built on that market position by focusing on three main factors – great products with a history of continuous development; well-funded marketing expansion including an ecosystem of third party developers and a strong corporate culture.
A typical customer would use the software to manage interactions with customers and prospects. The interactions with customers are recorded in the system either automatically (based on ecommerce interactions for example) or manually (where a salesperson records the details of a phone conversation or email exchange with a sales prospect). Using that information the software acts both as a ‘case management’ and a ‘task management’ tool. The advent of Covid, and remote work, has increased the value of Salesforce as a management tool.
An example of ‘case management’ would be where an individual customer is walked through an online e-commerce sales process and is then encouraged to complete the transaction and buy more. The software can be set to remind customers when they leave items in baskets without transacting; it can offer discounts or ‘up sells’ during the transaction process and it can follow up with emails advising of ship dates, delivery dates and follow on ‘coupons’ for discounts on future purchases.
