A Three-Minute Analysis of Salesforce

Bloomberg’s intelligence team included Salesforce in its hand-picked selection of the ten most attractive investment ideas for this quarter. Even the experts miss the mark sometimes, though. So I’ve used Finimize’s Markets tab – I’m not biased, I promise – to see whether Salesforce is worth buying.

Value: Is Salesforce cheap or expensive?

The Finimize markets tab summarizes a stock in four separate categories. The first is value: whether the stock is cheap or expensive. At the moment, Salesforce trades at an enterprise value-to-sales multiple – which compares its worth against the last year of sales – of 7.6x, while the median S&P 500 stock sits at 4x. The price-to-earnings ratio is heftier, too, at 30x versus the market’s 20x.

Together, those ratios show that Salesforce seems more expensive than the market. But if the fundamentals justify the price, then that’s to be expected.

Salesforce’s share price over the past six months. Source: Koyfin

Quality: Does Salesforce have strong fundamentals?

The quality section assesses a company’s fundamentals. Notably, Salesforce has grown its annual sales by an impressive 21% over the past five years, while the market has only managed 7%. The company’s operating margin – how much a firm makes relative to sales – is pretty much in line with the market’s 18.1% at 17%. The weakest metric today is its return on invested capital, which measures a company’s use of investors’ money. At 7%, it’s lower than the market’s 12%.

My takeaway: Salesforce’s sales are impressive, and if it can keep that up, the company could justify its lofty valuation. However, it could do with working on its profitability and capital returns.

Risk: How risky is Salesforce?

Salesforce’s beta of 1.6 means the stock tends to move up and down more than the overall index, which is typical for a growth-focused company. The company’s volatility – the range and speed of its share price movements – is 26% versus the market’s 16%. That’s high, but not overly concerning. Salesforce’s negative net debt is reassuring, showing that there’s more cash than debt on its balance sheet. That reduces the risk that the company will need to ask shareholders for cash or borrow money – especially at today’s high interest rates.

All in all, Salesforce seems to have a strong enough balance sheet to reassure me about the risk involved by taking on its higher price.

Sentiment: What do other investors think about Salesforce?

Analysts rate Salesforce shares a “buy”, on average, even though they’re not united across the board. Insider buying is marginally positive, and shares are now trading only slightly higher than the 50-day moving average.

It’s a somewhat reassuring sign that analysts seem positive about the company’s outlook. Plus, with the share price trading only slightly above its 50-day moving average, I wouldn’t consider the stock to be especially “overbought” or crowded.

Should you buy Salesforce?

Salesforce’s fourth-quarter sales showed signs of momentum, spurred on by fresh AI solutions. On top of that, the Finimize Markets data shows a strong balance sheet, a favorable outlook from analysts, reasonable fundamental valuations, and an attractive technical outlook.

The software and services sector is already ahead of the pack when it comes to using AI to get more efficient, and Salesforce is one of the leaders in the industry. That effort should turn into higher productivity and fatter profit margins over time. As a bonus, the company made like Meta and Google earlier this year, announcing its first dividend and an upsized share buyback program. Taking everything into account, I’d be inclined to agree with the Bloomberg Intelligence team on this one.