Salesforce, a Growing Software Conglomerate

Risk and opportunities of a Software giant

Salesforce has evolved from a pioneer Customer Relationship Management (CRM) software to one of the largest and most influential software conglomerates in the world. Since its IPO in 2004, Salesforce has not only grown its CRM business but has also expanded its footprint across various other fields through strategic acquisitions and new product offerings.

Today, Salesforce stands as a powerhouse in the software industry, growing and adapting with remarkable resilience and agility, and some bold moves. However, its expanding presence also brings significant challenges, including heightened competition. In this article, we explore Salesforce's growth trajectory, examine the factors driving its success, and analyze the associated risks and opportunities. Additionally, we will evaluate key metrics and determine a fair price for its stock, providing a comprehensive overview of Salesforce's position in the market.

Company overview

The company owns a vast array of IT products, many of which have been acquired and do not always align perfectly with Salesforce's core business model. For example, Salesforce offers a field service management product that can be utilized for maintaining energy utilities, which is outside its traditional CRM focus.

To provide clarity and structure, Salesforce categorizes its revenues into five segments:

• Sales. The Sales segment focuses on tools that help businesses manage their sales processes more efficiently. It provides features for managing leads, contacts, opportunities, and accounts. It also offers sales automation, forecasting, and performance management tools. This segment is designed to help sales teams track customer interactions, automate repetitive tasks, and ultimately close deals faster.

• Service. The Service segment is centered around customer service and support. It offers solutions for managing customer inquiries, cases, and support tickets across various channels like phone, email, chat, and social media. It includes features for case management, knowledge base, customer self-service portals, and omnichannel support.

• Platform & Other (incl. Slack). The Platform segment enables businesses to extend and customize Salesforce applications to meet specific needs.

• Marketing & Commerce. This segment focuses on tools for marketing automation, customer engagement, and e-commerce. It offers capabilities for email marketing, social media marketing, advertising, customer journey management. These tools help businesses create personalized marketing campaigns, understand customer behavior, and drive sales through digital channels.

• Integration & Analytics (incl. Tableau + MuleSoft). This segment includes MuleSoft, which is an integration platform for connecting various business applications and data sources, and Tableau, a powerful data visualization and analytics tool. The tools in this segment help businesses integrate disparate data systems, analyze data for insights, and make data-driven decisions.

Even some of Salesforce's core tools, such as Tableau and Slack, are used for applications that extend beyond the company's traditional business. This creates a diverse portfolio of software solutions that, while offering synergies, can also address a wide range of needs and attract new customers across various industries.

Synergies with the cloud

A Salesforce Cloud is a suite of cloud-based services provided by Salesforce. These services are designed to meet a variety of business needs, offering specialized functionalities tailored to different areas of operations, such as sales, marketing, customer service, and more. The purpose of each Salesforce Cloud is to enhance organizational efficiency, streamline processes, and improve customer engagement.

Built on a unified infrastructure, Salesforce Clouds provide a comprehensive set of features and tools that help businesses manage and automate key functions. These services typically encompass data storage, collaboration tools, reporting and analytics, customization capabilities, and seamless integration with other systems.

There are several main Salesforce Cloud types:

• Salesforce Sales Cloud is designed to streamline the sales process and optimize customer relationship management

• Salesforce Marketing Cloud is a digital marketing platform that empowers businesses to create, automate, and personalize marketing campaigns across various channels

• Salesforce Experience Cloud is a platform that allows businesses to create branded and personalized online experiences for their customers, partners, and employees

• Salesforce Service Cloud is a platform designed to provide outstanding customer service and support

• Salesforce Commerce Cloud is a cloud-based e-commerce platform that helps businesses deliver personalized shopping experiences across various channels

• Salesforce Analytics Cloud offers data analytics and visualization capabilities

Other cloud services exist for specific usage: Integration Cloud, App Cloud, IoT Cloud, Industry Clouds (like Manufacturing, Financial Services, Education, Nonprofit, Healthcare and Lifescience, etc)

This cloud offering allows modularity, a clear way to improve revenue by customer, scalability and recurring revenue.

20% of the customers have 4 or more clouds. They represent more than 85% of the ARR (Annual Recurring Revenue).

AI, a new growth driver

AI has the potential to significantly enhance Salesforce's business by enabling more personalized and efficient interactions, driving sales growth, increasingy administrative efficiency and improving decision-making.

By integrating AI into its platform, Salesforce can automate routine tasks such as data entry, lead scoring, or customer segmentation. This allows sales teams to focus on higher added-value activities like building relationships, closing deals. AI-driven insights can also predict customer behavior, suggest the best times for follow-ups, and recommend the most effective communication strategies. This leads to more effective sales processes, higher conversion rates, and ultimately, increased revenue for businesses using Salesforce.

Outside of the sales processes, given the vast array of applications and software that Salesforce offers, the possibilities for AI integration are virtually limitless.

This will also create value for customers, allowing the company to monetize it. AI can provide a more personalized and seamless experience. AI-powered tools like chatbots and virtual assistants can offer instant support, guiding customers through their journey and addressing their needs in real-time. Additionally, AI can analyze customer data to offer tailored product recommendations, helping businesses deliver more relevant and timely offerings. By leveraging AI, Salesforce customers can better understand their clients, anticipate their needs, and foster stronger relationships, leading to greater customer satisfaction and loyalty.

Strategy and capital allocation

The strategy is built on three core pillars:

• Customer success. Focused on delivering exceptional value to customers by offering a comprehensive platform with top-tier solutions.

• Acceleration. Aimed at driving sales growth, enhancing monetization, and boosting operational efficiency.

• Value. Committed to generating substantial value for the company and its shareholders.

Organic growth

The company has multiple levers to drive organic growth, including innovations like sales bots, contact center chatbots, the development of new modules and features, and deeper AI integration.

This growth is underpinned by a robust R&D strategy, with over 16% of sales dedicated to R&D. In 2024, R&D expenses are projected to exceed $5.5 billion, out of a total revenue of $34 billion.

Acquisitions

Salesforce has strategically expanded its platform and diversified its offerings through a series of key acquisitions. Notably, it acquired Slack for team communication ($27.7B in 2021), Tableau for business intelligence and analytics ($15.7B in 2019), and MuleSoft to integrate apps, data, and devices ($6.5B in 2018).

These three acquisitions have been particularly impactful, serving as significant growth drivers that are outpacing other areas of the business while generating valuable synergies. Given the success of these integrations, Salesforce is likely to continue pursuing acquisitions to further enhance and develop its platform.

Recent developments confirm the company's commitment to its strategy, as evidenced by three acquisitions in September 2024: Zoomin, Owl, and Tenyx.

Capital allocations

Beyond its investments in business expansion and acquisitions, Salesforce recently initiated a substantial share buyback program, valued at $30 billion. As of August 2024, the company has already repurchased $18.1 billion worth of its shares.

This capital allocation strategy was launched in response to criticism over the significant amount of stock-based compensation (SBC) and the resulting dilution of shares. Given the current pace of repurchases, it will take years to fully offset this dilution. Salesforce's outstanding shares increased from 631 million in 2015 to 991 million in 2023, but have since decreased to 956 million.

In addition, the company has introduced a modest dividend, with a low yield of 0.6% and a payout ratio of approximately 15%.

Outlook