A company with a great product can make investors a lot of money. Companies that can grow to launch new products and conquer new markets can be life-changing investments. Enterprise software giant Sales team (NYSE: CRM) is a good example.
Salesforce has evolved from one product to many, and the stock has returned more than 5,800% over time. The company is now worth $249 billion, so its best days of growth are likely over. Should investors buy the stock today?
How Salesforce Built Its Moat
Companies must consistently perform well to sustain success. Building a systemic competitive advantage, often a ditchtakes many years. Moats are important because they give companies pricing power and help protect them from competition.
For example, Walmart didn’t roll out of bed with the size and purchasing power to acquire and sell products at the lowest prices. The company earned that with years of growth through strong management and operational performance.
Salesforce has been growing for years on its CRM (Customer Relationship Management) software. A CRM program helps companies manage their customer base. Knowing your customers helps companies advertise, plan products, and make strategic decisions.
Salesforce’s CRM software, the core product, has been #1 for 11 years in a row. That’s consistently strong execution.
That said, there are more software pieces to the puzzle of running a business than just a CRM. Salesforce has spent years building and acquiring new products to create Customer 360. That’s the name for Salesforce’s software ecosystem, which offers a variety of tools and programs that businesses use to run their businesses. Outside of its CRM, Customer 360 offers software for marketing, sales, customer service, collaboration, and back-end software for collecting and analyzing data for insights.
Salesforce can cross-sell its other software to its CRM users. The more companies that jump into Salesforce’s ecosystem, the more stickier That’s because it’s harder to get everything out and replace it. That’s a canal.
Stimulating long-term growth
The enterprise software market is both vast and fragmented. There are millions of companies worldwide, but even an industry giant like Salesforce does business with only about 150,000 of them.
Salesforce offers growth opportunities in several directions. Growing companies are looking to adopt software and technology to reach the next level. There are opportunities in new industries and geographic markets. Management believes that the total available market will grow by double digits in the coming years and will exceed $290 billion by 2026.
The company aims to reach $50 billion in annual revenue by then; by 2023, that number will be about $35 billion. Customer 360 has become Salesforce’s single best tool for achieving and exceeding that goal. Cross-selling Customer 360 to existing customers now accounts for the majority of the incremental revenue Salesforce adds to its business. That’s the moat in action.
The engine seems to be bubbling, which makes analysts optimistic for the future. Estimates predict high single-digit revenue growth and double-digit profit growth for the next four to five years.
But is Salesforce a bargain right now?
Despite its healthy growth prospects, Salesforce has grown large and mature enough that investors should be careful not to overpay for the stock.
CRM PE Ratio (Forward) data by YCharts
Fortunately, the stock’s price-earnings ratio has fallen significantly over the past two years. The company has continued to grow earnings and the stock has fallen from its 52-week high. Valuations can change quickly as earnings rise and prices fall.
The stock looks attractive now with a forward P/E ratio of 26 due to expected earnings growth averaging over 19% per year for the next three to five years. Investors can use the PEG ratio to confirm how good a stock is agreement the stock is intended for that growth.
In general, as a long-term investor, I like to buy quality companies if their PEG ratio is below 1.5. If I do the math above, Salesforce’s current PEG ratio of 1.3 does indeed indicate an opportunity.
It may take a while, but great companies sell off every now and then. Salesforce took a few years, but long-term investors should give it the green light as a blue-chip tech stock worth keeping in their portfolio now.
Should You Invest $1,000 in Salesforce Now?
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Salesforce and Walmart. The Motley Fool has a disclosure policy.