Core Portfolio Insight - Salesforce (CRM)

Core Portfolio Insight - Salesforce (CRM)

December 08, 2021

Salesforce was founded in 1999 in San Francisco by Marc Benioff (the current co-CEO) and three others. The company sells customer relationship management (CRM) software. What differentiated Salesforce from other enterprise software companies at the time was the "software-as-a-service" (SaaS) model in which Salesforce's software was accessed over the internet through a web browser. Since then, Salesforce grew into one of the largest technology companies in the world with a market cap of $260B as of December 2021. 

Salesforce pioneered the SaaS model that we take for granted today. SaaS replaced traditional software that required physical distribution in which a user would buy a perpetual license with a high up-front cost. Salesforce's CRM software was delivered over the internet through a web browser and sold using a subscription model. All parties benefit from this model because the user has a low up-front cost, is always upgraded to the latest version, and can access the software anywhere, while Salesforce benefits from a steady stream of recurring cash flows. 

The two charts above show Salesforce's high level of growth over a 15 year period. The top chart, from Salesforce's Investor Day 2021, describes Salesforce as the fastest growing enterprise software company ever. It takes the years since the company was founded and plots how fast the company reached $5B, $10B, and $20B of revenue, with an ultimate goal of $50B of revenue. Salesforce achieved these milestones faster than Microsoft, Oracle, and SAP. The bottom chart shows the company's Free Cash Flow (FCF) (green line) and CRM's stock performance relative to the S&P 500 (blue line). One can see that Salesforce's FCF is growing strongly over time at a 32% annualized rate, while CRM's stock is outperforming the market over the last 15 years. 

There is a lot of opportunity for growth over the next five years as management expects a Total Addressable Market (TAM) of $248B by calendar year 2025, growing at a 13% cumulative annual growth rate (CAGR). Salesforce upgrades its product offering through acquisitions, the largest being Slack earlier this year, now included in the Platform reporting segment. Management sees Slack becoming the Digital HQ for companies in the future, connecting people, partners, customers, and systems. Other notable acquisitions recently include Tableau and MuleSoft, which are now in the Data reporting segment. MuleSoft is a fast growing business but saw a slowdown in the most recent quarter. Management is confident in a quick turnaround for MuleSoft. 

Salesforce meets the criteria of a GPM Grade Company: a high quality U.S. based leader with a history of innovation and superior sales and earnings growth. The company has the size and scale to compete worldwide, producing a product for which demand can be created, increased, and broadened. Management executes on creating economic value and has a focus on long term sustainable growth.