Selling power (NYSE:CRM) fell out of favor with investors this year, but this now creates an attractive opportunity for new buyers. The company is going through a major strategic shift as it enters a new phase of its corporate life cycle. As investors process this change, stock valuation ratios are now too cheap to ignore.
1. Growth remains a positive point
Salesforce has been a high-growth star for years, but it’s entering a more mature phase. The company’s revenue growth rate slows as it approaches market saturation. This is a natural part of the business maturation process, and companies typically move slowly from expansion to profitability as they reach scale. This can be a complicated process in the stock market as growth investors give way to value investors who have different objectives and risk tolerance.
Salesforce is in the midst of this change, but it’s important to keep things in perspective. The company continues to grow faster than the broader economy and many publicly traded companies. This is especially true compared to other large-cap stocks. The company’s sales rose 11% in its most recent quarter, the same rate as a year earlier. Its forecast and analysts’ consensus estimates call for growth of between 7 and 9 percent for the full year.
Salesforce is not for you if you are looking for a dynamic disruptor with huge growth potential. That said, the company continues to grow fast enough to deliver impressive returns to shareholders. Don’t confuse a slowing growth rate with a low growth rate.
2. Salesforce transformed into a treasury center
Improving profitability becomes essential as growth slows, and Salesforce is achieving this goal. The company has implemented impressive cost control measures, which have resulted in rapidly improving profits and cash flow as sales increase.
Salesforce’s operating margin was 19% last quarter, compared to 5% in the same period last year. The company’s adjusted margin was 32%, after excluding certain one-time and non-cash expenses. Improving margins through higher sales means profits exceed revenue.
Free cash flow might be the most important fundamental metric for valuing a business. Financially healthy companies can either distribute cash flow to shareholders or devote that cash to growth through hiring, product development, or acquisitions.
Salesforce reported more than $6 billion in free cash flow last quarter, or more than 60% of quarterly revenue. Much of this comes from changes in working capital, such as collecting unpaid invoices, but it is reasonable to expect free cash flow to approach 40% of revenue in the future.
The company’s operating cash flow has grown at an annual rate of 26% over the past three years. Investors who are skeptical of its revenue growth rate should keep the company’s impressive results in mind.
3. The stock’s valuation is attractive
Many growth investors turned to greener pastures as Salesforce’s pace of expansion slowed. The market also reacted unfavorably to several factors, including the company’s outlook for this year and recent news regarding potential acquisitions. These factors combined to dismantle title dynamics – it is down significantly from its pandemic-era and current-year highs.
This is not a bad thing for potential investors. On the contrary, Salesforce stock now has a forward P/E ratio of 23 and a price-to-free cash flow ratio of 20. These values ​​are low compared to many of its large-cap enterprise software peers . The 26% cash flow CAGR also suggests that Salesforce’s PEG ratio is less than 1, which is generally the benchmark for an attractive growth-adjusted valuation.
Salesforce has a broad economic base and bright prospects for cash flow growth. Its valuation no longer reflects the high sales growth rate the company achieved in previous years. The stock has clear financial fundamentals to support its valuation over the coming years. This tilted the balance of risk towards long-term upside potential.
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Ryan Downie holds positions in Salesforce. The Motley Fool reviews and recommends Salesforce jobs. The Mad Motley has a disclosure policy.
3 Reasons to Buy Salesforce Stock Like There’s No Tomorrow was originally published by The Motley Fool
