Morningstar | Salesforce Reports Good 3Q; Healthy Broad Based Growth Underlies Strong Position; Shares Undervalued
Salesforce reported a good third-quarter result and consequently raised its full-year revenue and EPS outlook. Still, we had been expecting a strong result from this wide moat firm and only modestly adjust our full-year expectations. Our $180 fair value estimate is unchanged and we continue to see the firm trading at a discount. We believe Salesforce benefits from strong switching costs and a network effect related to its platform-based software offerings. Additionally, with the addition of MuleSoft and a concerted investment approach to artificial intelligence tools, we are confident in heightened stickiness around Salesforce's product portfolio.For the quarter, reported and constant currency revenue rose 26% year over year to $3.39 billion. Total remaining performance obligation, or RPO, rose 34% to $21.2 billion, while current RPO increased 27% to $10 billion indicating a very healthy level of revenue in the future pipeline. Salesforce's bread-and-butter sales cloud and service cloud revenue grew 11% and 24%, respectively. Meanwhile, the smaller Salesforce platform & other and marketing cloud & commerce cloud platforms surged 51% and 37%, respectively. Although we expect some sales moderation in the more mature sales cloud business, we continue to forecast rapid growth for the less mature cloud businesses given a large total addressable market opportunity.
Enterprise demand for digital transformation products and services will remain a tailwind for Salesforce and we believe the firm’s leading status in customer relationship management, among other burgeoning lines of business, will underline the firm’s solid long-term standing in the market. Breadth and depth of the company’s product offering will also attract enterprises as they seek to simplify their IT and infrastructure. As a result, we are confident in Salesforce’s wide moat rating.
On the margin front, non-GAAP operating margins dipped 76 basis points to 16.9% and GAAP operating margins fell 303 basis points to 2.7%. We expect operating margins (both GAAP and non-GAAP) to surge over the next decade as Salesforce begins to benefit from operating leverage. Additionally, we think the firm is heavily investing in new product launches and development to amplify its TAM which understates its normalized operating margins.
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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