Aiming for Long Term Growth
Ashish is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
believe that Salesforce (NYSE: CRM) has plenty of growth aspects with the continued success of its Service Cloud and increasing traction of its Marketing Cloud. Furthermore, I see the recent acquisition of Buddy Media as incremental to long term revenues. With the Chatter offering helping reduce customer attrition with the networking efforts in a subscription based model, I remain positive for this stock and would recommend it as a buy for long term investors.
Acquisition of Buddy Media- Opportunity around the marketing cloud:
Acquisitions are trending faster in the last three months in the highly nascent and fragmented social media marketing space. While Google (NASDAQ: GOOG) acquired wildfire in July, Oracle (NASDAQ: ORCL) acquired Virtue in May. Salesforce recently completed the acquisition of Buddy media to tap the growing marketing cloud opportunity. Buddy Media's products help customers to create, manage and measure the marketing campaigns across social media channels with their tools such as ConversationBuddy, ProfileBuddy etc. I believe that this acquisition would help Salesforce to offer a complete suite of a social marketing platform for its customers built around Chatter, Radian6, Buddy media, Heroku and site.com to effectively manage customers in real time. I believe that as the CMO’s start spending more than CIO’s (with technology taking a back seat to marketing); this could evolve as a considerable market opportunity for Salesforce in the long term.
Operating margins leverage opportunity once the investments moderate
CRM is working the tradeoff between growth and margins, as it is prioritizing growth investments to gain positions in key secular markets. Apart from meaningful M&A (including Heroku, Radian6, and Buddy Media), CRM continues to invest in sales efforts in order to tap growth opportunities in Service Cloud and Platform markets. I believe that this is a step in the right direction and margins would improve going forward as the company matures. I see significant margin leverage opportunity once investment in sales and growth moderate. While currently CRM is having around the same gross margins as its more mature peers like Oracle, Microsoft (NASDAQ: MSFT) and SAP (NYSE: SAP), the operating margins are significantly lower. I expect CRM’s operating margins to grow at par with its mature peers like Oracle, Microsoft and SAP at 20-30% as the company matures and the investments moderate.
Source: Company reports and TheAnalystHub.com research
International expansion could provide new wings to the growth story
In FY12 Salesforce generated around 68% of its revenues from Americas, 18% from EMEA and 14% from APAC. While the international revenue has grown significantly when I compare it to FY08 when international revenues from APAC and EMEA consisted of a total of 26%, it still lags behind mature competitors such as Oracle and SAP who derive around 50% of their revenues from international markets. We believe that while Salesforce has faced reluctance in acceptance of its on-demand computing model outside the Americas, the barrier is lessening now. We expect Salesforce could see greater revenues with the increasing traction of its products from international geographies in the near term.
I believe that Salesforce is one of the best secular stories in software right now with its considerable involvement in mobile, social and cloud offerings. While the recent sales hire and M&A would put pressure on margins, I believe that they will favourably impact revenues overtime. Salesforce has plenty of scope to gain market share in the international markets as the acceptance of on demand cloud computing increases in EMEA and APAC. With its secular growth story and good fundamentals going forward, I rate Salesforce as a buy.
Note: The article was originally published on TheAnalystHub.com. For more in-depth research articles please visit our site today.
TheAnalystBlog has no positions in the stocks mentioned above. The Motley Fool owns shares of Google, Microsoft, and Oracle and has the following options: short AUG 2012 $130.00 puts on Salesforce.com, long AUG 2012 $150.00 puts on Salesforce.com, short JAN 2013 $150.00 calls on Salesforce.com, and long JAN 2013 $150.00 puts on Salesforce.com. Motley Fool newsletter services recommend Google and Salesforce.com. 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.If you have questions about this post or the Fool’s blog network, click here for information.
