Morningstar | Salesforce One: We see Clear Skies for Salesforce in CRM and Beyond
We came away from Salesforce.com's Dreamforce expo and fiscal 2019 analyst day with increased confidence in the firm's "software-as-a-service" leadership, our wide moat and positive moat trend ratings, and our revenue and margin expansion assumptions for the business. Therefore, we are raising our fair value estimate to $180 per share, from $175 previously. We believe the firm's top line will benefit from aggregate customer relationship management strength, multicloud expansion (where Salesforce cross-sells into its current customer base), and geographic expansion into Europe, the Middle East, Africa, and Asia-Pacific.Salesforce's Dreamforce announcements, such as its partnership with Apple, Customer 360, and Einstein Voice, cemented our assumptions. Each of these products will allow Salesforce to increasingly sell into its current install base and cement switching costs. Dreamforce also focused on MuleSoft, which was acquired for $6.5 billion in March 2018. We think MuleSoft enhances Salesforce's moat, as it is the glue behind enterprise customers' IT systems, and can ease transitions to cloud applications, potentially serving as a tailwind for the rest of Salesforce's SaaS application businesses.
In terms of the bottom line, we think the SaaS business model understates Salesforce's long-term profit potential, as there is a mismatch between costs and revenue recognition. Concurrently, as secular tailwinds propel the aggregate CRM market, Salesforce has invested in head count and new products to drive revenue growth while the industry is still in land-grab mode. Chasing this revenue growth has been to the detriment of GAAP operating margins, but, longer term, we see significant potential for margin expansion as Salesforce matures. Combined with the recent market sell-off in high-growth software names, we see an attractive margin of safety for investors today.
We remain bullish on Salesforce because of its ability to cross-sell further into its current customer base, secular tailwinds in customer relationship management, and margin expansion opportunities. New product announcements at Dreamforce and a focus on the recently acquired MuleSoft give us confidence that Salesforce's growth runway remains robust.
Salesforce.Com is engaged in customer relationship management technology. The company's Customer 360 is an integrated platform that unites sales, service, marketing, commerce, integration, analytics and more to give companies a single, shared view of their customers. Through its platform and other developer tools, the company also enables third parties to develop additional functionality and applications, or apps, that run on its platform, which are sold separately from or in conjunction with the company's service offerings. The company's cloud service offerings include sales cloud, service cloud, marketing and commerce cloud, and salesforce platform and other.
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