Former Oracle Corporation executive Marc Benioff co-founded Salesforce in 1999 along with Parker Harris, Dave Moellenhoff, and Frank Dominquez. The software-as-a-service company suffered from the collapse of the dot-com bubble at the beginning of the new millennium but it managed to bounce back due to its strong focus on cloud-based software products. It now has become a premier provider of customer relationship management solutions. The company has also expanded its portfolios of software products and software company subsidiaries. This article lists and discusses the pros and cons or advantages and disadvantages of investing in Salesforce stock.
Looking Into the Performance of Salesforce: Weighing the Pros and Cons of Salesforce Stock
Pros: Salesforce Stock Advantages
Salesforce has carved its name in the more specific market for customer relationship management or CRM solutions. It also offers cloud-based software products used for marketing, customer service, electronic commerce, and data analytics. The company has also been establishing and acquiring new business units. It is the parent company of several software companies like Acumen Solutions, Heroku, MuleSoft, Slack Technologies, Tableau Software, and Quip. It also has an investment arm via its Salesforce Venture. Below are the advantages of Salesforce Stock:
• Large-Cap Stock: Salesforce trades in the New York Stock Exchange under the ticker CRM. It is a component of the Dow Jones Industrial Average, the S&P 100, and the S&P 500. The company is a large-cap stock with a market capitalization of over $250 billion. Investing in Salesforce stock is ideal for those looking for relative stability, better liquidity or lower liquidity risk, and strong institutional confidence.
• Still A Growth Stock: However, despite its large-cap status, another notable advantage of Salesforce stock is that it is still considered a growth stock due to the growth potential of cloud computing and the general software industry. The demand for cloud-based enterprise solutions is rising due to the emergence of newer businesses and the expansion of existing ones. Investing in the company is ideal for growth investing.
• Financial Health: The company has demonstrated strong financial performance over the years. It generated a revenue of $21.25 billion in 2020 and managed to grow its revenue in 2023 to $34.6 billion. The annual gross profits since 2020 have also been increasing, and it increased such from 2022 to 20223 by 18.11 percent. Salesforce also has a strong cash flow for reinvestment, share repurchase, and dividend payouts.
• Strong Revenue Model: Most of the income of Sales is recurring. This comes from its subscription business model. This provides a stable and predictable revenue stream for the company. Most of its income streams are also considered stick revenues because its software products are often deeply integrated into the operations and value chains of its customers, thus resulting in high and strong customer retention rates.
• Dividend Payouts: Another advantage of Salesforce stock is that it has the potential to release dividends to its shareholders due to its strong cash flow. Take note that this is not guaranteed. However, beginning in 2024, the company has released dividends for the first and second quarters with a yield of 0.61 percent. Investing in Salesforce stock can be a great addition to a growth-focused income-generating portfolio.
Cons: Salesforce Stock Disadvantages
The competition in the software-as-a-service industry and the specific business-to-business or enterprise segment has become competitive due to the relatively low entry barrier and increasing consumer bargaining power. Salesforce has been competing with other dedicated CRM solutions providers and other software companies. Some of these competitors have also offered more competitive price points. The long-term prospect of the company hinges on its ability to create and maintain a unique selling proposition. Below are the disadvantages of Salesforce stock:
• Strong Competition: The market for CRM solutions is populated not only by Salesforce but also by larger competitors like Microsoft, Oracle, and Zoho, and smaller companies like Pipedrive and Zendesk. Salesforce also competes with other smaller companies like Bitrix24 and Monday.com. The intensity of competition prevents incumbents from raising their prices and increases the bargaining power of customers.
• Limited Accessibility: One of the main criticisms of Salesforce is that its range of software products and solutions is relatively expensive. There are alternatives that are either more affordable or free. The entire platform and ecosystem can also be complex for some due to the extensive features and integration challenges. These issues make Salesforce products inaccessible to certain segments of the general market.
• Premium Stock Price: A specific disadvantage of Salesforce stock is that its stock price is considerably more expensive than other tech companies. It trades its shares at a price that is even higher than companies like Alphabet, IBM, and Nvidia. The historical stock price of the company has been above $200 per share since 2020 with some price swings in 2022 and eventually recovery to the above $200 mark in 2023.
• Growth Expectation: Investors expect the company to exceed its growth targets. This is reflected in its high stock price and the fact that it is a growth stock. The company is essentially overvalued. Failure to meet this expectation can result in a loss of confidence and further lead to a significant stock price decline. The company needs to grow further amidst risks from competition, market disruption, and economic downturn.
• Possible Correction: The high stock price of Salesforce has been considered a premium valuation. This means that it is higher than either its intrinsic value or the market value of its competitors. The high stock price comes from its leadership in the CRM market, strong financial performance, and innovative reputation. However, because it does not reflect its intrinsic value, its stock price is susceptible to market correction.