Investor Optimism Abounds Salesforce, Inc. (NYSE:CRM) But Growth Is Lacking

You may think that with a price-to-sales (or “P/S”) ratio of 7.6x Salesforce, Inc. (NYSE:CRM) is a stock to avoid completely, seeing as almost half of all the Software companies in the United States have P/S ratios under 4.3x and even P/S lower than 1.6x aren’t out of the ordinary. Although, it’s not wise to just take the P/S at face value as there may be an explanation why it’s so lofty.

View our latest analysis for Salesforce

What Does Salesforce’s P/S Mean For Shareholders?

Recent times haven’t been great for Salesforce as its revenue has been rising slower than most other companies. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. However, if this isn’t the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Salesforce will help you uncover what’s on the horizon.

Is There Enough Revenue Growth Forecasted For Salesforce?

There’s an inherent assumption that a company should far outperform the industry for P/S ratios like Salesforce’s to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 11%. This was backed up an excellent period prior to see revenue up by 64% in total over the last three years. Therefore, it’s fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 10% per annum as estimated by the analysts watching the company. With the industry predicted to deliver 15% growth per year, the company is positioned for a weaker revenue result.

With this information, we find it concerning that Salesforce is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company’s business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Salesforce’s P/S?

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Salesforce, this doesn’t appear to be impacting the P/S in the slightest. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. Unless these conditions improve markedly, it’s very challenging to accept these prices as being reasonable.

It’s always necessary to consider the ever-present spectre of investment risk. We’ve identified 2 warning signs with Salesforce, and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on Salesforce, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.