Salesforce’s stellar strategy: from growth to gains

Friday 19 May 2023

Portfolio updates

Share this

As technology juggernaut Salesforce enters a new stage of its corporate life cycle, it is worth analysing the company’s impact and potential future trajectory. Salesforce is now moving from a ‘growth at all costs’ model to one of sustainable, profitable expansion. This transition phase has created volatility in its share price, even as its long-term fundamentals remain robust. Salesforce’s GAAP operating income has surged by 3.5x over the last three years and is forecast to rise by 8x in the next three years.

Organic growth and efficiency

As Salesforce pivots to a new growth strategy, there are substantial changes on the horizon. The executive leadership team has changed its focus from frequent mergers and acquisitions to nurturing and growing its core business. It is ready to concentrate on integrating past high-profile acquisitions, such as Slack, Tableau and MuleSoft with its existing suite of products. This promises to enhance product value, bolstering existing customer relationships and retention rates.

The fresh focus on integration should also pave the way for Salesforce to consolidate its sales organisation. The potential for greater efficiency here is substantial. Over 40% of Salesforce’s revenue currently goes toward sales-and-marketing expenses (S&M). In comparison, similarly sized peers spend an average of 15-25% of their revenues on S&M. By reducing these expenses, Salesforce stands to achieve significant margin improvements.

Harnessing the power of AI

Another exciting prospect for Salesforce lies in the realm of generative AI. Due to its scale, Salesforce is in a unique position to continue investing in R&D while leveraging its vast network of existing customer touchpoints. In the AI race, companies with the broadest base of touchpoints are in a favourable position. These firms can expedite the rollout of AI, delivering immediate benefits to users.

Salesforce Einstein GPT

One of Salesforce’s key AI solutions, Einstein, could serve as an integration platform for its other products. This approach allows the company to market Salesforce as a holistic solution rather than as individual components. This could significantly enhance its top and bottom lines, increasing cross-selling opportunities with a leaner sales organisation.

Multiple expansion: a window of opportunity

As part of its potential for value growth, Salesforce presents an attractive opportunity for multiple expansion. The company trades at a forward EV to adjusted EBITDA multiple of 15x, decreasing to 10x by 2026 on our forecasts. To put this into perspective, Salesforce has traded at greater than 50x over the past decade. While we do not anticipate the company returning to such lofty multiples, there is ample room for expansion from its current levels. Given Salesforce’s quality, robust growth profile, and improving profitability, a forward multiple of 15x appears relatively undervalued when compared with its peer group.

The future awaits

Given these opportunities for revenue growth, margin expansion, and potential multiple expansion, Salesforce has multiple levers to drive investment returns. Having a sturdy balance sheet with a net cash position and generating substantial free cash flow adds to the company’s financial strength. And although recent departures of key executives have stirred some concerns, the remaining leadership team led by founder/CEO Marc Benioff is well and truly capable of executing the strategic plan.

The road ahead for Salesforce is largely within management’s control, and its share price performance ultimately comes down to execution. Investors who understand the company’s shifting dynamics can capitalise on the opportunities this phase of sustainable growth presents. Salesforce’s strategic transition could well be an exciting journey of transformation and growth.

About the Author
Swell Investment Team

Swell Investment Team

Members of the investment team contributed to this article.