Salesforce stock is serious long-term value right now

Cloud Computing Pioneer Salesforce.com (RCMP -0.85% ) putting the finishing touches to an excellent 2022 financial year (the 12 months ended in January 2022) with little fanfare. The stock price has barely budged and remains near its 52-week low, down more than 30% from its all-time high.

Salesforce was caught up in high-growth technology selling spurred by the Federal Reserve’s promise to start raising interest rates this year. Nonetheless, the digital transformation leader continues to improve its expectations for the year ahead and remains on track to meet co-founder and CEO Marc Benioff’s goal of reaching $50 billion in annual revenue in a few years. Stocks look like great value right now.

Image source: Getty Images.

A great end to the year, with or without Slack

The big news for Salesforce last year was, of course, its biggest acquisition of business collaboration software company Slack last summer. It paid a high price in its bet on remote and hybrid working, but Salesforce’s growth performance is holding up. Fiscal 2022 revenue grew 25% year-over-year to $26.5 billion, up 22% excluding Slack’s $584 million in revenue in during the two quarters he was part of the Salesforce family.

Salesforce Segment

Revenue for the 2022 financial year

Change (YOY)

Service Cloud

$6.47 billion

20%

sales cloud

$5.99 billion

15%

Platform and other*

$3.93 billion

18%

Marketing and trade

$3.90 billion

25%

Data

$3.78 billion

28%

*Excludes $584 million in revenue from Slack in fiscal year 2022. Data source: Salesforce. YOY = year after year.

Salesforce increased its total number of shares by approximately 5% (comparing total shares outstanding in Q4 2022 with a year ago) following its acquisition. However, it’s still early in the game for Salesforce to integrate Slack into its operations. In the meantime, it was promising to see free cash flow increase 29% over the past year to $5.3 billion. The shares are now trading for 38 times the free cash flow of the last 12 months at the time of writing.

On track to achieve ambitious goals

Of course, a stock trading at almost 40 times the free cash flow of the last 12 months isn’t exactly cheap. But given the company’s trajectory in terms of revenue growth and profitability, stocks seem to me to have great long-term value right now.

For one thing, Benioff and company usually exceed their promises. It’s not a guarantee that the trend will continue, but Salesforce raised its expectations for fiscal 2023 again during the earnings report. Revenue guidance has been raised by $300 million and is now expected to reach $32.1 billion, an increase of approximately 21% year-over-year (including $1.5 billion in sales of Slack). Free cash flow is also expected to grow 25% to 26% year over year, according to chief financial officer Amy Weaver.

This pace of expansion keeps Salesforce on track to meet its long-standing goal of reaching $50 billion in revenue per year by fiscal year 2026 (the period that will end in January 2026, but is mostly calendar year 2025). All Salesforce needs to do is an average growth rate of a high percentage of teens during that time, excluding new acquisitions. And if free cash flow can grow at the same rate (with about a 20% margin on revenue), that means Salesforce shares are currently trading for about five times the free cash flow of fiscal year 2025. .

I’m making a lot of assumptions here that might not be true. For example, Salesforce is a serial acquirer of other software vendors. Its share count could continue to grow and dilute current shareholders, not to mention cause a temporary setback in profitability. But the long-term trend remains intact. Salesforce has generated a lot of shareholder value over the past decade and a half.

Chart showing the increase in free cash flow per share for Salesforce since 2012.

Data by YCharts.

Another great year is coming for Salesforce as it helps its global clientele drive digital transformation and adapt its clients’ employees to hybrid and remote working. Stocks seem to have great value right now if you plan to hold them for at least a few years.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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