Salesforce Earnings Out This Week – CRM Stock Looks Undervalued Based on Its Free Cash Flow

Salesforce Inc. (CRM) is set to release its earnings on Wednesday after the market close. The company recently started paying dividends on top of its already generous stock buyback program. Moreover, management gave higher operating cash flow guidance for the full year last quarter. 

CRM stock looks cheap here after closing at $272.29 on Friday, May 24. This is near its recent 3-month lows, up just 1.3% from its May 1 low price of $268.69 per share.

Based on my analysis of its cash flow guidance, CRM stock could be worth over 23% more at $335 per share. This article will show why.

Free Cash Flow Estimates

Last quarter ending Jan. 31, 2024, Salesforce produced 11% Y/Y higher revenue at $9.29 billion and a similar gain for its full-year sales of $34.9. But more importantly, it generated $3.4 billion in operating cash flow, and after a small capex spend it made $3.26 billion in free cash flow (FCF) during the fourth quarter. 

That means that its Q4 FCF margin was very high at 35% (i.e., $3.26b/$9.29 b in sales). Moreover, the company provided guidance which said that it expects to see 21% to 24% higher operating cash flow for the full year ending Jan. 2025.

Since the operating cash flow last year was $10.23 billion, this implies that it expects to see up to $12.685 billion in operating cash flow. Given its small capex spending that could work out to about $12.1 billion in FCF.

However, FCF could be much higher than that going forward. For example, analysts forecast between $38 and $42 billion in sales over the next two fiscal years, or $40 billion on a run rate basis. If we take the Q4 FCF margin and apply this to this estimate it works out to $14 billion (i.e., 0.35 x $40b = $14b).

Moreover, even if we annualized the Q4 FCF figure of $3.4b billion, it implies $13.6 billion in FCF (i.e., $3.4b x 4 = $13.6b). So, just to be conservative let’s use a $13.5 billion FCF estimate.

Price Targets Based on FCF

We can set a price target based on this FCF estimate. For example, right now CRM stock has a 4.6% FCF yield. This is seen by dividing the company’s $12.1 billion FCF guidance for this year by its $264.5 billion market cap.

So, if we divide our $13.6b FCF estimate by 4.5% the estimated market cap over the next 12 months will be just over $300 billion (i.e., $13.6b/0.045 = $302 billion). That is 14% higher than today’s market value of $264 billion.

Moreover, using a 4.0% FCF yield metric puts its market value at $340 billion. That is 28.5% higher. And if the company generates $14 billion in FCF next year, as I suspect it will, this raises the market cap estimate to $350 billion, or 32.3% higher.

So, on average that works out to a price target that is 23% higher on average or $335 per share. Sell-side analysts also have higher price targets as well

Analysts Price Targets

For example, Yahoo! Finance reports that the average price target for 42 analysts is $336.10. That is very close to my price target based on FCF. In addition, Barchart.com reports that 40 analysts based on its survey have an average price target of $327.21 per share. 

In addition, AnaChart.com, a new sell-side analyst tracking service reports that the average of 39 analysts is $303.43 per share. That is still 11.44% over today’s price.

In other words, every single analyst survey shows that the sell-side community believes the stock is undervalued. The table below from AnaChart shows that 5 of the top performing analysts (in terms of stock price prediction) have higher price targets.

The table above from AnaChart shows that these analysts all have price targets over $300 per share and many are substantially higher. The table shows that these analysts have met their price targets well over ⅔rds of the time – i.e., the lowest Price Target Met Ratio is 66.67% and one is over 94%.

That shows that these analysts all have a high degree of confidence that their price targets will be met when they set them.

The bottom line is that CRM stock looks undervalued here.

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On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.