Salesforce Inc Multi-cloud strategy to fuel revenue growth May 24, 2022 756

PSR Recommendation: BUY Status: Initiation
Target Price: 258.00
  • Salesforce’s revenue is expected to increase 21% YoY to US$32.1bn in FY23e, led by broadening of its product portfolio and cloud-based digital spending by businesses.
  • Salesforce’s ability to provide a full, integrated suite Customer 360, instead of point solutions, has been a differentiated competitive advantage and significant driver of new customer wins and expansion deals. The total addressable market (TAM) will grow to US$248bn by 2025, driven by acquisitions (Slack, MuleSoft, Tableau), internal innovations, and organic growth from acceleration in digital transformation.
  • We initiate coverage with a BUY recommendation and DCF-based target price (WACC 6.1%) of US$258.

Company Background

Salesforce (CRM) is one of the key cloud-based enterprise software solutions provider, with a focus on customer relationship management (CRM). The company currently has over 150,000 paid customers globally that depend on its software solutions to manage sales, customer service, marketing, and analytics (Figure 1).

Investment Merits

  1. Broad product portfolio serves as a competitive advantage. Salesforce has maintained its dominant position in the CRM market by developing a suite of connected cloud computing services and leveraging customer data. Salesforce’s CRM applications are integrated within its Customer 360 platform that can be customized for each business and industry. As a result, businesses can get a 360-degree view of their own customers as Salesforce Customer 360 platform connects all client data across sales, service, marketing, commerce, and data analytics. Salesforce’s ability to provide a full, integrated suite, instead of point solutions, has been a significant driver of new customer wins and expansion deals. Salesforce’s management expects its total addressable market (TAM) to reach US$248bn by 2025, representing CAGR of 13% over 2021-25. The main drivers for this expected growth are acquisitions (Slack, MuleSoft, Tableau), internal innovations, and organic growth from acceleration in digital transformation spending. We expect total revenues to grow by 21% YoY in FY23e.


  1. Salesforce continues to innovate Sales Cloud offering. Salesforce has broadened its reach by transitioning to the cloud and widening the market definition. It has also introduced innovative features such as subscription management, revenue intelligence, and sales enablement, which are contributing to reaccelerating Sales Cloud growth. Sales Cloud subscription revenue grew by 15% YoY to US$6bn in FY22. We expect Sales Cloud revenues to grow by 16% YoY in FY23e as businesses rethink their sales processes.


  1. Multi-cloud adoption is key to expansion. Cross-selling into the existing installed base will drive revenue growth in the future as customers add incremental licenses. Salesforce’s multi-cloud customers accounted for 95% of annual recurring revenue (ARR) in FY22. In FY22, 79% of the incremental annualized revenue came from existing customers. The software company’s effective cross-selling strategy has enabled it to offer seven clouds to customers, with the ARR from four or more clouds up 3x since FY18. We believe there is still opportunity for Salesforce to expand within its existing client base, and increased multicloud adoption will be a major driver of expansion.


We initiate coverage with a BUY rating. Our target price is US$258 based on a DCF valuation with a WACC of 6.1% and terminal growth of 4.0%.



Salesforce has two revenue segments: Subscription and Support (93% of FY22 revenue) and Professional services and others (7%). Subscription and Support revenues  include subscription fees paid by clients that use its enterprise cloud computing services (Sales Cloud, Service Cloud, and Marketing and Commerce), software license-related businesses Tableau and MuleSoft, and technical support. Professional services and others include revenue associated with services such as consulting, deployment, training, and implementation.


Total revenue expanded at 26% CAGR in the past five years (Figure 3). Over FY18-22, Salesforce’s Subscription and Support revenues rose at a CAGR of 26% to US$24.7bn in FY22. The growth was due to a volume-driven surge from new business, including new customers, additional subscriptions from existing customers, upgrades, as well as reduced attrition rate for its services.


The Americas (68% of FY22 revenue) is Salesforce’s biggest market (Figure 4), followed by Europe (23%), and Asia Pacific (9%).


Gross margins averaged 74% in the past five years. This was mainly because Salesforce’s revenue is primarily made up of subscriptions, resulting in a continuous purchasing cycle for customers. Operating margin declined from 4% in FY18 to 2% in FY22 due to the sales & marketing push, rising headcount, and investments in technology. We expect operating margins to be 4% in FY23e and 6% in FY24e.


Net margins in FY22 were 6%, down from 19% the previous year. The change is primarily because the company recognized a tax benefit of US$1.5bn on a pretax income of US$2.6bn in FY21. The tax benefit was associated with intra-entity transfer of intangible property.



Assets: In FY22, cash and cash equivalents decreased by 12% YoY to US$5.5bn. Marketable securities also decreased by US$700mn. Fixed assets for FY21 were US$5.7bn, up from US$1.9bn in FY18, largely due to ongoing CAPEX spending. The company’s current ratio for FY22 is 1.0x.

Liabilities: Current liabilities for FY21 were US$21.8bn, almost US$4.1bn more than FY21. This increase was mainly due to a rise in accrued expenses and unearned revenue. Non-current liabilities saw a jump of US$8.2bn in FY22. Salesforce had a net debt position of US$5.1bn in FY22 (Figure 5). Salesforce’s debt-to-equity ratio remains low at only 0.2x.



Cash-flow from operations has steadily risen at 23% CAGR to US$6bn (Figure 6) from FY18 to FY22. CAPEX stood at US$0.7bn in FY22, rising at 9% CAGR over FY18-22. In FY22, Salesforce generated US$5.3bn in free cash flow. This translates to a 20% free cash flow margin. Salesforce’s ability to generate significant amounts of cash allows it to acquire firms.

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