If you ask sales personnel which tool they use most at work, a likely answer could be Salesforce (CRM 0.68%). There is a reason that the company uses the ticker symbol CRM to represent itself on the public market -- it's the clear leader in customer relationship management (CRM) software.
With market share growing and the stock price declining during a tumultuous market downturn, there are three good reasons for long-term investors to embrace the company's stock.
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Replacing a CRM system is a huge undertaking
The company's product portfolio includes Salesforce CRM, Slack, Tableau, and Mulesoft, each providing cloud offerings that allow its customers to benefit from a 360-degree view of customer data. As mentioned, Salesforce is the market share leader in CRM systems. The company controlled 23.9% of the market in 2021, more than its four largest competitors -- SAP, Oracle, Microsoft, and Adobe -- combined. That reflects a huge one-year jump from the 19.5% in 2020 and continues a three-year upward trend from 16.8% in 2018.
Market share can fluctuate, but what makes this number important to investors is that CRM systems are not easy to replace. A higher market reflects higher sales, and with that often comes a higher number of customers. Often the entire sales and marketing staff are entrenched in the CRM system on a daily basis working with data related to customers, prospects, opportunities, and closed deals.
For a company that might already have a CRM system in place, it can take a herculean effort from a time and money perspective to replace it. The system has complex integrations, automation, and secure data that would need to be transitioned without slowing down the workforce in its efforts to meet quota -- and that doesn't include the hours spent in training.
CRM software is also a tool for which prospective buyers might rely on testimonials to help make a buying decision. When there are more current customers willing to promote the features, the better the possibility for the testimonials to bring in a new customer.
Record revenue leads to raised guidance for FY 2023
Fourth-quarter and full-year revenue jumped 26% and 25%, respectively, year over year, totaling $26.5 billion. That led to raised guidance for revenue of $32 billion this year, exceeding previous guidance of $31.7 billion. The number is driven by strong renewals and new business and bolstered by two full quarters inclusive of the Slack acquisition that took place in July 2021.
Stronger revenue beat the Street's estimate by 1% and led to earnings that topped estimates by 13%. But in April, multiple analysts, including Jefferies' Brent Thill, lowered price targets in the wake of an overall market decline. For investors who got in on Salesforce since November's all-time high of $311, that's not the news they may have hoped for, but for long-term investors on the fence about diving in, this might be a great time to buy shares for the long haul.
The stock is down 44% since that high, at only $174, while revenue, margin, and operating cash flow are all on the rise. Some investors may caution against a price-to-earnings (P/E) ratio of 116, which is three times that of its largest competitors, but a deeper look tells us that the number is below the company's 10-year average P/E ratio of 152 and below 90% of P/E ratios in the software industry, giving it some room to run based on history.
An 11.1% CAGR for the market should lead to years of growth
In order for the stock to run, the company will need growth. The CRM software market is expected to grow at a sturdy 11.1% compound annual growth rate (CAGR) through 2027, reaching $96 billion. By comparison, that is more than double the $41 billion in 2019. As the market grows, it could easily lead to further growth for Salesforce based on its current market share and an expanded product set.
Companies like IBM, Deloitte, and Ford, which are going through a revolutionary transformation, depend on Salesforce. As those companies bring on additional resources to achieve higher goals, it should result in additional license subscription revenue and potentially a larger marketing stack -- an integrated set of technologies that make up a full product suite available to a marketing and sales team to optimize their performance and results. And as more companies reach a level where sales and marketing cloud services are necessary to support growth, it should drive new revenue for Salesforce.
