DCF Conclusion Study on SalesForce (CRM)
CRM: Top 10 Stock Component in the Dow Jones Industrial Average
Note: CRM reported earnings this evening and is experiencing a large adverse reaction. This note will attempt to discuss risk/reward on CRM after the selloff.
Hi Everyone,
I am strategically doing more DCF Conclusion Studies of Key Index Companies while the markets are in a digestion phase of the recent rally.
My edge in NQ (Nasdaq-100) is constructed with the DCF Conclusion Studies that I have done on the top 10 QQQ ETF stocks.
Because I am attempting to build an edge in the Dow, which I see as having diversification effects relative to NQ in the future, I am actively doing these DCF Conclusion Studies on the Dow as prep work.
The companies which I am unable to do DCF Conclusion Studies on are Financial Banking Stocks because I build out EBITDA based models and Banks do not report EBITDA.
Salesforce is seeing quite an adverse reaction post-earnings (reported to be the worst post-earnings reaction since the Financial Crisis in 2008). We’ll discuss what is potentially the a strong risk-adjusted way to more safely gain exposure if one is interested in this cloud name.
SalesForce DCF Discussion/Context
Salesforce (CRM) is a leading cloud name that builds applications on Customer Relationship Management tools. Its direct peers include Microsoft, Adobe, Oracle, and Snowflake.
After a blistering run in 2023, Salesforce’s stock has grown conservatively in 2024 (before this recent earnings outcome). Cloud names as an investment theme have been more challenging this year as we can see below that Adobe and Snowflake are taking a pause from their 2023-fueled bull run.
The company missed Revenue expectations this quarter, an occurrence that last happened in 2006.
We’ll discuss more details below.
Exhibit 1: DCF Core Figures from 2024
Here are the conclusions that I’m drawing:
After this latest quarter, I think it’s possible that Wall Street begins to cut estimates for Revenue and EBITDA in the coming years. I think, to start, the adjustment will probably be around 50-100 basis points (.5%-1%) on the top line revenue figures.
Although Salesforce lifted EPS guidance for 2025, the Street cares far more about EBITDA, which I believe came under slight pressure this quarter as the company faced “budget scrutiny and longer deal cycles” among their prospective clients.
It’s likely that the Buy Side will attempt to calculate what terminal EBITDA margins are likely to look like after dissecting the conference call. Their conclusions will move the stock.
Margin Commentary (Margins are incredibly important to the DCF Model):
Salesforce has enjoyed a corporate high EBITDA margin of 28.57% relative to its own history. This naturally meant that any type of hint that margins would flatten out or begin to even moderate lower would be met by selling pressure.
As a company, Salesforce is fundamentally doing just fine. However, in Wall Street thinking, there is always what is known as an “Opportunity Cost” discount/premium associated with certain stock’s potential. If a stock isn’t perceived to have immediate rewards for shareholders, capital does tend to flow towards what has been proven and what is working in the moment.
Valuation
From a longer-term perspective, Salesforce’s valuation is not demanding given that they have grown their EBITDA at nearly a 20% annual clip over the past several years, which has made their stock reasonably priced.
We can see below that at 25.8X EV/EBITDA, the company isn’t expensive relative to its own history.
However, this is precisely why I have done the DCF Conclusion Studies on the Top 10 QQQ ETF stocks (table below).
Notice that at least 50% of the names in the Top QQQ ETF stocks list have an EV/EBITDA ratio less than Salesforce’s 26X. And even in a Bull Case Scenario for the Top 10 QQQ ETF Stocks, still, most of these companies have ratios less than 26X.