Why Salesforce Stock Looks Quite Undervalued

Salesforce stock (NYSE: CRM) has lost 6% YTD, as compared to the 16% rise in the S&P 500 over the same period. Overall, at its current price of $248 per share, it is trading roughly 20% below its fair value of $307 – Trefis’ estimate for Salesforce’s valuation. 

CRM stock has been on an upward trajectory in the last three years. But the growth has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 14% in 2021, -48% in 2022, and 98% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could CRM face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

The company outperformed the consensus estimates in the second quarter of FY 2025 (FY Feb-Jan). It reported total revenues of $9.33 billion – 8% more than the year-ago period. The growth was driven by a 9% increase in the subscription and support revenues, which benefited from improvement in the sales cloud, service cloud, and platform & other categories. In terms of costs, the operating expenses witnessed a favorable drop in the quarter, leading to an operating margin of 19.1% vs 17.2% a year ago. Overall, the net income jumped from $1.27 billion to $1.43 billion.

The company’s top line grew 10% y-o-y to $18.5 billion in the first half of FY 2025, primarily because of an 11% rise in the subscription & support revenues. Further, total expenses as a % of revenues decreased in the year, improving the operating margin from 11.2% to 18.9%. Altogether, it led to a net income of $2.96 billion – more than double the year-ago figure.

Moving forward, the company expects the Q3 revenues to remain between $9.31-9.36 billion and earnings to range between $1.41- 1.43 respectively. Overall, we estimate Salesforce’s revenues to be around $37.79 billion in FY2025. Additionally, CRM’s revenue per share (RPS) is likely to increase to $37.27. This coupled with a P/S of multiple of 8.3x will lead to a valuation of $307.

[1] Returns as of 9/5/2024
[2] Cumulative total returns since the end of 2016

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