Is CRM Stock Overvalued?

Salesforce.com, inc. (NYSE:CRM) has made a splash with its biggest acquisition so far, buying Slack for $27.7 billion in cash and stock. The technology giant hopes the acquisition will help it to compete with rival Microsoft Corporation (NASDAQ:MSFT) on another front.

Investors didn’t receive the news especially well; CRM share price responded by dropping over 10 percent in value on the announcement. This sparked bearish investors to wonder whether the acquisition is not accretive to earnings and, therefore, is CRM stock overvalued?

Benioff and his management team chose to pay well over market value for the chat app, which lost steam during a pandemic that should have boosted it. Google Hangouts, Microsoft Teams, Zoom (ZM), and Discord experienced much more user growth. But integration into existing Salesforce clients could be the boost both companies need.

By tracking the data on these two companies, prospective buyers can better see if their fusion will create a new enterprise technology conglomerate or an expensive failure for loyal investors.

Why CRM Stock Went Up

As businesses large and small accelerated their digital growth strategies, Salesforce benefitted. Everything from work-from-home for employees to home ordering and delivery for customers is now standard and necessary.

This is Salesforce’s bread and butter – a customer relationship management (CRM) platform that seamlessly integrates into enterprise software.

Its revenue model is a software-as-a-service (SaaS) subscription model to access the various applications within its cloud-based network. This includes CRM, marketing automation, customer contact, and more.

It also has an aggressive acquisition strategy to outpace enterprise tech giants like Microsoft and SAP. This includes tech companies like Tableau and MuleSoft. Its most recent buy of Slack adds team collaboration and communication to the mix.

Not only does the company have its own proprietary tools, but there’s an entire secondary market of third-party tools that run on it. This makes the company integral to the success of other companies, much like its more established competition.

Here’s a snapshot into the company’s 2020 financials.

CRM Financials

Salesforce has recovered from a 52-week low of $115.29 to a high of $284.50 upon its August 2020 (second quarter for fiscal year 2021) earnings report.

A look at its projected earnings per share show that a rising trend of earnings that is the envy of most companies. The subscription model lends itself to this kind of rising trend, alongside a highly sticky platform of course.

It showed a 29 percent year-over-year revenue increase of $5.15 billion for the quarter, increasing its FY2021 guidance to $20.8 billion. It also reported $5.42 billion for the third quarter, representing a 20 percent year-over-year increase while raising 2021 guidance to $21.11 billion.

Based on this information, the company took a chance with its $27.7 billion Slack purchase. This is going to eat into the bottom line and has already caused its share price to take a hit.

It was trading below $250 during the 2020 holiday season, which may prove to be a deal for bearish investors, if it can successfully eat into market share over the next few years that is currently held by giants like Amazon (AMZN), SAP and Microsoft (MSFT).

Is CRM Valuation Too High?

Skeptical investors wonder if Salesforce overpaid for Slack. The company was initially set up for success when the world moved ever more digital due to lockdowns. An online collaboration tool is an easy win with everything moving virtual – except it didn’t happen.

Instead, Microsoft saw the opportunity to place a roof on the company’s growth potential by offering its own Slack competitor, Teams, into its Microsoft 365 suite of enterprise tools. This caused Slack to file an antitrust suit against the tech giant in the European Union. Even if it wins, the damage was already done, and it faces an expensive legal battle.

The inclusion of chat into Salesforce does more to add value to existing offerings than to increase revenue by any means. Of course, it could be enough to convince some of Microsoft’s existing enterprise customer base to migrate.

Salesforce is picking up the slack in a financial and legal sense, and this caused investors to drop it like a hot potato at the start of December. CRM stock price dropped by over 20 percent upon the announcement and is settled at a notably lower price point.

Even if it outperforms analyst estimates for the next quarter, the purchase caps its own growth potential. But just because growth is limited, will the company’s stock price fall?

Will CRM Stock Drop?

CRM and automation platforms are becoming increasingly important, and Salesforce competes with the likes of Microsoft (MSFT) and Amazon (AMZN) in its cloud-based SaaS offerings. While it’s certainly not small, Salesforce pales in comparison to these other giants, and it has fewer revenue streams.

The company has a wide selection of enterprise products, but it lacks the consumer exposure of other tech companies. Amazon generates a lot of revenue through its Prime subscription service and associated retail sales. Microsoft has OEM deals with laptop manufacturers and its own gaming division.

While Salesforce has an impressive enterprise slate, it lacks the diversification of other technology conglomerates. This could limit its ability to pay down debt and continue providing value for investors.

Is CRM Stock Overvalued? The Bottom Line

Salesforce had a great 2020 and expanded its revenue to outpace analyst expectations every quarter in 2020. Travel restrictions pushed more companies and customers digital, and that was the opportunity for the company to accelerate revenue growth and continue its aggressive acquisitions strategy.

However, its most recent acquisition of Slack caused a major dent in the company’s market cap. It could represent a major value for those who missed the first momentum swing. The combination of these companies represents a major threat to Microsoft’s enterprise customer base.

But it’s not an automatic win – Slack already has an antitrust suit against Microsoft for severely limiting its growth during the pandemic. Its inclusion into the Salesforce umbrella gives it wider exposure, but the company still needs to convince existing customers to migrate from Teams while picking up new ones.

This limits the company’s potential growth over the next few years, but it could still outperform the market.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.