Salesforce's ticker is CRM, which is short for customer relationship management, and is exactly what they specialize in. Much of the company's success can be attributed to its Customer Success Platform, a premier enterprise cloud ecosystem. The Customer Success Platform is a comprehensive portfolio of service offerings that provides a single view of the customer across all touchpoints. Essentially, with everything becoming more connected, Salesforce is the one that brings together the cloud, mobile, social, IoT, and artificial intelligence technologies to help businesses better understand data and what their customers want.
The Salesforce Platform is also home to the Einstein, which is an artificial intelligence technology that delivers almost 2 billion predictions every day and helps make recommendations based on unique and specific processes and customer data. Again, Salesforce is all about innovating the customer experience, and the Einstein represents a data scientist that makes customer relationship management smarter and efficient.
Our bullish thesis on CRM is mainly predicated on:
Generative AI = Entering the Next Tech Super Cycle. Similar to cloud, mobile and social, AI will be a new revolutionary innovation cycle that will spark a massive new tech buying cycle, in management's view. Salesforce sees an opportunity to upsell and cross-sell product categories into the next version of generative AI. For example: (1) Einstein GPT will provide tools to design generative AI apps and offer an extensible ecosystem of LLM providers without needing to move all the data into the LLM itself; (2) Tableau GPT will simplify data analysis; and (3) Slack GPT will deliver instant conversation summaries, research tools and writing assistants directly in Slack. Further, Slack is emerging as a well-positioned interface for working with LLMs and provides an opportunity to be a significant data asset to feed LLMs. While product capabilities and direct monetization remain debates, we see an opportunity to leverage both (1) upgrades in subscription-based pricing, and (2) consumption-based pricing of genAI capabilities.
Executing on Cost Control and Margin Expansion. While management cannot control the economy, it can control cost discipline and margin. The restructuring announced in January 2023 and ongoing initiatives have driven margin above 30%, and will continue to improve.
Target Price: $275
We arrive at our price target by applying a 25x forward P/E multiple to CY2025 estimated earnings of $10.98/share. This multiple is already a discount compared to large-cap software peers (such as ServiceNow at 50x, Intuit at 30x, Workday at 28x). The multiple is reasonable for a 2024-2025 earnings growth of 11%, making a PEG ratio of 2.27 (compared to ServiceNow at 2.5, Intuit at 2.37, Workday at 1.93). Additionally, a 25x forward multiple is at the bottom range of what the stock has historically traded at in the past 10 years (high of 100x in 2014, low of 22x in 2023).