A SWOT Analysis For This Cloud Giant
Gaurav is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Salesforce (NYSE: CRM) has been a leader in innovation when it comes to cloud computing and SAAS services. With its impressive Q3 results, it has justified the confidence of investors in cloud-based companies. Here I have done a Strength, Weakness, Opportunity, and Threat analysis to dig deeper into the prospects for this company.
1) As mentioned in the Dreamforce analyst day, Salesforce is seeing multi-cloud success, as 76% of the top 40 deals saw 2 or more clouds being purchased.
2) Salesforce has less exposure to the FX headwinds compared to its peers, as it generates only around 30% of total revenue outside of the US
3) Salesforce services are mainly designed to be intuitive and easy to use. With the many tools and features the same as other websites, Salesforce offers a more familiar user interface than typical enterprise applications.
4) Seeing a high level of stickiness as attrition rates have declined from high teens to low teens from 1Q 2011 to 1Q 2013.
1) Lots of competition in the cloud space, with competitors like Amazon (NASDAQ: AMZN) vying for cloud computing market share. Amazon has already launched a formidable competitor to Salesforce with Amazon Web Service (AWS), which provides a whole bundle for a consumer use with services like reserved instances and integrated management console. Amazon has focussed on consumer needs to provide the businesses with a whole package, rather than small pieces here and there.
2) The cloud market is inadvertently a place of war for the top guns. IBM (NYSE: IBM) has also entered the arena with the recent announcement of low cost cloud products. The company also announced an increase in performance and efficiency of their Smarter Computing systems.
1) The CRM opportunity will reach $20 billion by 2017 as estimated by CRM, which comes out to be a CAGR of 14.87%. Given CRM’s ability to penetrate the Small and Medium level Business, this estimate could prove conservative.
2) CRM estimates that the opportunities beyond CRM could reach $40 billion by 2017.
3) According to the CSO Insights 2012 Sales Performance Benchmark Report (survey of 137 global sales organizations in 21 countries), 51% of the organizations don’t use a commercial CRM system until now.
1) The Cloud services may give lower than expected returns-With the risk rewards ratio the cloud computing industry offers, the investors are looking for overly well returns. A lesser than expected return from the cloud services might result in CRM shares being pressurized.
2) Vulnerable to Macroeconomic Situations-With most of the consumers being small and medium sized businesses, a change in macroeconomic conditions in a scenario like a recession might result in huge churn levels.
The Bottom Line:-
CRM has seen around 10 years of consecutive market share growth, and yet the opportunities are endless. The cloud computing market is still in its nascent stage and CRM, being one of the first companies to go after this opportunity, looks to perform much better in the coming years. While the P/E ratio of 79 surely looks on the higher side, the value and future growth Salesforce promises justifies it.
gauravguru has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and International Business Machines. Motley Fool newsletter services recommend Amazon.com, Salesforce.com, and International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!