Investment Thesis

Salesforce (NYSE:CRM) had its Investor Day yesterday, on the same day the market read through every comma, comment, sigh, and breath, from the Fed's Chair Jerome Powell.

The market's attention was distracted. After all, the market can only really track one news item at a time.

But as we now go through and discuss Salesforce's Investor Day, particularly its fiscal 2026 targets, I question whether there's really enough to excite new shareholders to this stock. I believe that Salesforce's new guidance didn't lead to significant surprises.

Indeed, I make the assertion that investors want to see cleaner GAAP profits. And that ultimately, investors are not looking too kindly to paying 26x non-GAAP EPS figures.

What's Next for Salesforce?

Let's be honest, despite all the excitement over Marc Benioff's co-founded company, Salesforce's stock has not been all that exciting. Yes, there have been a few winning periods, but as a whole anyone that's come to the stock after 2019 is more likely than not, holding a loser in their holding. That's 3 very long years. Difficult as it may be to imagine, this once crowd pleaser could turn out to be an investment ''dog''.

Salesforce has clearly succeeded in being the default company for businesses of all sizes and shapes to turn to and execute their marketing campaigns. But the stock got ahead of itself.

Salesforce's Guidance in Focus

Salesforce has highlighted for us all to see that its strongest growth says are in the rear-view mirror. The guidance out to fiscal 2026 points to a 17% CAGR. Yes, there's a possible outcome where Salesforce is able to outgrow its own guidance.

But one way or another, the die is cast. Salesforce's revenue growth rates are maturing.

The Market Has Started To Ask Questions about Salesforce's Compensation

Fiscal 2023 is guided to 20% of non-GAAP operating margins. Concurrently, just under 11% of total revenues are being made up of stock-based compensation.

Nevertheless, as we look ahead, Salesforce declares that its profit margins will expand into fiscal 2026.

Now consider the following thought exercise. At 25% of non-GAAP margins on the back of $50 billion of revenues, we should expect Salesforce's stock-based compensation to trickle lower as a percentage of total revenue.

Can Salesforce get its SBC below 9%? Maybe it gets to below 8%? Maybe it's 7%? If we assume 7% and add 3% for the amortization of its acquisitions, that means that Salesforce's 25% non-GAAP profit margins translate into 15% GAAP margins. Note, I've been conservative and assumed 3% in amortization of intangibles, which is half the current amortization percentage, of 6%.

That means that investors in the stock in 2026 could expect to see $7.5 billion of operating profits.

That means that investors today are having to pay 20x its operating profits looking out 3 years into the future.

Surely, that's a rich multiple?

CRM Stock Valuation - 26x Fiscal 2024 non-GAAP EPS

Now, let's get a little bit closer to home. Salesforce finishes its fiscal year in January. Looking out to fiscal 2024 (ending January 2024), Salesforce is priced at 26x its fiscal 2024 non-GAAP EPS.

I believe that this is a ''growth'' multiple for a business that is clearly not a growth stock anymore.

Despite recognizing all the potential and how deeply ingrained Salesforce is into the modern workforce, and how the company is essentially leading the digital transformation, I simply can't make the valuation work.

The Bottom Line

The market is showing no signs of letting up on Salesforce's stock in 2022. That means that over the next couple of quarters, as tax loss season takes hold, I believe that there's a substantial likelihood that the selling pressure increases.

When that happens, my argument is that too many investors will at the same time be challenging Salesforce and asking difficult questions about their investment.

And that's going to pose a significant problem for existing shareholders because they've so long become accustomed to ''trusting'' that Salesforce would do well. Indeed, it's very likely that a large proportion of Salesforce's shareholders use its products.

Yet, despite what Peter Lynch taught us, using the product isn't always the same as being rewarded for holding the stock. Even though admittedly, that works the vast majority of the time, I believe that Lynch's lessons may have been taken too far.

Indeed, I don't believe that present-day investment manager Peter Lynch would hold onto a stock that's priced at approximately 26x next year's EPS when there's a consensus agreement that Salesforce is going to be growing at less than 20% CAGR. After all, Peter Lynch did teach us the PEG ratio too.

At Dreamforce 2022, CRM platform provider Salesforce unveiled two new products focusing on carbon credit market transparency and productive services for teams to get more value from their digital HQ. 

Dreamforce, which runs at the Moscone Center in San Francisco through Wednesday, is Salesforce’s annual event, which began in 2003.

Salesforce announced the Net Zero Marketplace, a platform that’s designed to enable simple and transparent carbon credit purchases, allowing organizations to accelerate climate-positive impact at scale, and three Slack tools designed to enhance productivity. enhancing productivity.

Net Zero Marketplace: A carbon credit platform

Salesforce’s Net Zero Marketplace aims to connect buyers with ecopreneurs — environmentally focused entrepreneurs — in a trustworthy and transparent carbon credit platform to scale climate-positive impact.

According to a report by McKinsey, the global voluntary carbon market is estimated to grow to $50B by 2030 as many organizations race to achieve their net-zero commitments. However, organizations may not always know where to begin or how to develop a carbon credit portfolio. 

Furthermore, the process of obtaining carbon credits can be complicated, and buyers want to be confident that the carbon credit projects will have a positive impact. Salesforce intends to address such concerns through its Net Zero marketplace.

Built on Salesforce’s commerce cloud and powered by the company’s new real-time CRM Genie, the platform offers a catalog of third-party rated carbon credits. The Net Zero Marketplace also features a climate action hub where businesses or individuals can learn about the latest climate issues and connect with other ecopreneurs. 

According to new Salesforce research on the sustainability talent gap, 8 in 10 global workers want to help their company operate sustainably, with 3 in 5 eager to incorporate sustainability into their current role. 

Patrick Flynn, SVP, global head of sustainability at Salesforce, told VentureBeat that Salesforce recently added sustainability as its fifth core value and has been actively using carbon credits as a part of their own climate strategy for five-plus years. 

“One must start with emission reduction plans that consider not only your own operations but also the entire value chain consequences, including initiatives to catalyze systemic emission reduction effects beyond your value chain,” said Flynn. “Empowering such efforts was one of our main reasons for creating the Net Zero Marketplace, which also greatly complements our Net Zero cloud.” 

Flynn said that the Net Zero Marketplace will enable individuals and organizations to collaborate on building better carbon credit portfolios and using carbon credits as a part of their overall climate action strategy. 

The Net Zero Marketplace also eliminates the time-consuming process of finding and verifying a carbon credit’s quality by aggregating and publishing third-party ratings for projects not locked behind paywalls or account registrations. This level of transparency helps organizations determine which carbon credits are best for them.

“The unique part in this experience is that when anyone comes and learns about a project and learns about an ecopreneur, they will also be able to see a transparent pricing and third-party ratings, a key differentiator in our offering,” Nina Schoen, director of product management, Net Zero Cloud Salesforce told VentureBeat.

For organizations currently using Net Zero Cloud, Salesforce’s carbon accounting solution, the credits can be integrated into the platform and tracked against their current emissions. Buyers will also get updates on project progress, which encourages reinvestment.

New Slack innovations to enhance team productivity

Salesforce also announced new Slack features at Dreamforce to make it more productive for teams to work together in their digital HQ, allowing them to pull in actionable data directly from Salesforce Customer 360. 

Slack Canvas, which will be available next year, is a new tool that will enable teams to select, organize, and share critical resources. When combined with the new Slack platform and Customer 360, teams can integrate data from record systems into the canvas and automate business-critical workflows.

Building on its audio-first experience, Slack huddles will now offer teams lightweight video conferencing, multi-person screen sharing, message threads, and more to power live coworking sessions. 

“The nature of work is changing, and most organizations today use Slack as a digital HQ for synchronous communication with their team,” said Tamar Yehoshua, chief product officer at Slack. 

At Dreamforce, Yehoshua said that the new Slack tools will help organizations increase team productivity and get the most value from their tech stacks by connecting conversations, automation, and apps in one space. 

With the Marketing Cloud for Slack integrations, teams can set up, execute and measure their campaigns directly in Slack. Powered by Marketing Cloud Account Engagement, marketing and sales teams can leverage real-time alerts and align within Slack channels to prioritize lead follow-up, analyze pipeline impact and iterate on campaigns instantly. 

Once a campaign is live, teams can include in-flight campaign performance data using Marketing Cloud’s Intelligence Insights for Slack integration in the channel and canvas. This feature aims to provide marketers a custom view of the campaign’s performance data in one place for teams to monitor trends, align on strategy and shift investments. 

The new Slack platform and huddle features will start rolling out today and will be generally available to all users in the coming weeks.

It’s been a big week for Salesforce. Its annual Dreamforce 2022 conference — which saw an estimated 40,00 in-person attendees — delivered some big innovations and announcements. According to the keynote presentation from CEO Marc Benioff, Salesforce is one the biggest enterprise software companies in the world, including the leader in cloud-based CRM. Its impressive growth in the last few years shows no signs of slowing as the company pushed its long-term revenue target to more than $50 billion by 2026 in its investor day event that took place during Dreamforce.

The company made a bevy of announcements at the event, but two major announcements caught my attention, warranting further analysis: Salesforce Genie and Slack Canvas. The first will completely shift Salesforce’s existing CRM to enable real-time capabilities, applications, and uses that weren’t possible before. The latter will help the company finally realize the potential of its Slack acquisition and increase its ability to compete with the likes of Microsoft and an ever-growing collaboration marketplace for an even larger piece of the business tech pie–Something that has been part of the Salesforce talk track for some time, but is now much more within reach. Let’s break these down.

Salesforce Genie: Magic in a Software Program

Salesforce called its new Salesforce Genie offering its “biggest innovation in 20 years.” The goal, like every other CRM on the market today, is to create a real-time single source of truth for businesses so that they can create hyper-personalized content and, in turn, create tighter relationships with customers. From one day to the next, businesses use hundreds of different apps to move their companies forward. In the past, uniting the disparate information from all of these different sources has been nearly impossible. But Salesforce Genie aims to conquer the issue for good, pooling and harmonizing data, as the announcement put it, into a clearly reconciled, comprehensive customer portrait.

Salesforce Genie in effect is a data integration model that works with Salesforce’s existing CRM platform. It aims to move data where it is needed at the right time. This will turn the CRM into a real-time data, insight, and action machine which, until now, has only been an aspiration and not a reality.

In an era when third-party data tracking is on the outs, Salesforce Genie could be a huge asset. It could help businesses match the right audiences with the right products on the right channels at precisely the right time. A silver bullet for marketing and customer experience, which is perhaps why Salesforce likes to refer to it as “Magic” in a way. Genie has the potential to be the force that finally allows all of Salesforce’s disparate tools to work together in the way customers have always hoped they would. Also, for those wondering: Eventually, Genie powers will also be added to other Salesforce tools like MuleSoft and Tableau.

Initial thoughts on the Genie announcement are that Salesforce knows it’s facing growing competition in the CDP and CRM world. Combined with Einstein AI, as well as latest flexible public cloud data deployments and integrations with Hyperforce, Salesforce is making it clear that it has zero plans of letting any part of its market share go. However, any first mover advantage here will be short-lived as I fully expect its competition in Microsoft, Oracle, SAP, and others to continue pushing for greater real time and AI capabilities. Furthermore, pricing will be in focus as well as enterprise pricing for Genie versus value will surely be in focus as the offering hits the market.

Unleashed Collaboration with Slack Canvas

While Genie was the main headline, I was personally more intrigued by the advancements that were made by Slack and Salesforce. I’ve long felt that Salesforce had a compelling suite of offerings that could truly realize what it is calling the “Digital HQ,” however, it has lacked the complete vision and tools within Slack to meet the evolving landscape of work patterns and collaboration in its previous iterations.

Despite that, Since the acquisition last year, Salesforce has been touting integrations that will maximize productivity and enable flexible work in one environment. And while that wasn’t really the case before–especially in comparison to the comprehensiveness of Microsoft Teams, I do think it is becoming a reality with the advent of Huddles and now Salesforce Canvas, a new surface where work teams can organize and share information from multiple sources. The workspace is envisioned to be a digital headquarters where teams can connect conversations, apps, and automations in one place. According to the Dreamforce presentation, there are more than 2,500 apps in Slack, and the goal is for all of them to work in Canvases in the future.

The move is a smart one for Slack — and the first big announcement since the acquisition. In the past, its bookmarks and pins left a lot to be desired. They were hard to use if they were used at all. Canvas will connect systems of productivity with systems of record, allowing teams to get information quickly, generate time-saving automations, build low and no code apps, and better serve customers — all without leaving Slack. The impressive solution, which has been in beta testing for some time, will allow users to compile files, messages, and multimedia into a template that can be stored and accessed later.

In case you’re having trouble understanding how a Canvas would work in real life, imagine the employee onboarding process. With Canvas, HR can easily create a Canvas with every link, training video, document, etc. that a new hire needs to know with limited tech knowledge needed. You can even embed workflows on every Canvas page that could order new employee requirements like mobile devices, laptops, business cards, and other requirements in a seamless manner without ever leaving Slack.

Looking Forward

In focusing on forward-facing developments like Genie and Canvas, it seems clear that Salesforce is aware of the growing competition in the CRM/CDP space and likewise intends to feverishly defend its CRM market position.

These announcements, along with the others that came out this week, showcase Salesforce’s continued and strong focus on growth. At the end of August, the company announced Q2 revenue of $7.2 billion, up 22 percent year over year. And while both of these new announcements won’t be in GA until sometime in 2023, it’s looking probable based upon the company’s latest forecast revision that the numbers will continue to climb over the next several quarters. Salesforce has a track record of delivering outsized results, and while there were many valuable updates and announcements at this year’s Dreamforce, my belief is that its Salesforce Genie and Slack Canvas have the potential to be momentum builders for Salesforce and will be critical to the company continuing to realize strong growth as we head into an even more complex macro and business environment.

Salesforce is putting a new customer data platform, Genie, at the heart of its software to deliver real-time access to customer information across the enterprise.

“Genie is the world’s first real time CRM,” said chief product officer David Schmaier on the eve of the company’s Dreamforce 2022 customer conference. “It’s a high-speed, hyper-scalar data lake infrastructure that powers all of Salesforce’s applications.”

Running on Hyperforce, Salesforce’s public cloud, the new customer data platform (CDP) uses the same metadata as the rest of the Salesforce platform, and connects with the company’s Flow automation tools and Einstein AI-powered recommendation engine, enabling them to operate with real-time data too.

For Sheryl Kingstone, VP for customer experience and commerce at 451 Research, Genie could be a solution to the business problem of creating unified customer profiles based on a single source of truth, finally getting rid of customer data siloes across every department, business unit, and all the different regions, she says.

It’s been a challenge for Salesforce to get to the point where it can combine its rich legacy of transactional data with more modern sources of real-time data, according to Kingstone.

“They were doing it in stages,” she said. “Salesforce acquired MuleSoft to solve app integration, but it didn’t solve the data integration problem. Einstein solved some of the architectural shifts to bring the data together, but it still was a baby step.”

A bigger step toward solving the data integration problem, she said, came with Salesforce’s 2020 acquisition of personalization software vendor Evergage, which enabled it to rethink the data architecture of its applications from the ground up.

It’s not just about Salesforce applications, though: Genie also opens a gateway to Snowflake’s data cloud; enables Amazon’s SageMaker AI models to interact with Salesforce data in much the same way as its own Einstein models; and through Salesforce AppExchange will allow third-party developers to create apps that exploit its capabilities. Already, 18 partners have created apps for the Genie platform, Salesforce said.

All this gives Genie the power to release customer data trapped in the marketing department, according to Liz Miller, VP and principal analyst at Constellation Research.

“For the most part, CDPs are sold as marketing toys that address marketing things, but what we have here is a unified data model that is now a shared service across the stack,” said Miller.

Better yet, Genie’s open approach means it’s unlikely to interfere with CIOs’ own data lake strategies, she said.

“It might not be as sexy as big new unveils, but it can deliver and is real, which I think the market craves after decades of chasing lofty terms like ‘personalization,’” said Miller. “It makes Customer360 usable instead of it being an aspirational model of what we want to achieve.”

As 451’s Kingstone surmised, the new customer data platform has its roots in Salesforce’s 2020 acquisition of Evergage, which had built a personalization engine (later rebranded as Salesforce Interaction Studio) on top of its own CDP.

Genie has parts of that Evergage CDP at its heart, according to Patrick Stokes, general manager for Salesforce Platform.

“It was originally constructed with quite a bit of the lake house type of capability that Evergage brought to bear,” he said. “We’ve since updated that pretty significantly to implement Apache Iceberg.”

Iceberg, an open-source table format originally developed at Netflix, is key to Genie’s openness. It enables the efficient use of SQL for big data analytics, and is supported by data lake engines including Snowflake, Dremio and Spark.

Although Snowflake is Salesforce’s marquee partner for data sharing with Genie, the door is open to anyone who wants to implement Iceberg, whether they’re a software vendor or an end user, Stokes said.

Genie officially goes live on September 20, the opening day of Dreamforce, but behind the scenes, hundreds of enterprises are already using it to personalize customer interactions, Stokes said.

Among them are L’Oréal, which is interconnecting online and offline shopping experiences with Salesforce; Formula 1, which is using it to connect with motor racing fans; and Ford, using it to provide a single source of truth all the way from purchase through onboarding of connected services to ongoing maintenance of its vehicles. Ford can use Genie for everything from scheduling periodic service to delivering urgent roadside assistance, he said.

However, not everyone will benefit from the new real-time capabilities, Stokes said, but there are situations where the difference between live and day-old data can be critical.

A key feature of Genie is that data — whether clinical, environmental or transactional — isn’t just ingested in real time: “We have the ability to stream all of that in in real time and make what we call calculated insights in real time,” he said. “In the healthcare industry, they’re trying to keep their customers alive. Operating off batch data can literally be life or death for some.” Fraud prevention applications will also benefit from Genie’s real-time capabilities, he said.

The ultimate goal of pulling customer data together into a customer data platform (CDP) is building more meaningful customer experiences in real time. Up until now, that’s been more aspirational than real, but Salesforce is announcing Genie, a real-time data integration platform, today at the Dreamforce customer conference, which aims to make that dream a reality.

At its core, Genie is a new data integration model that underlies the entire Salesforce platform with the aim of moving data wherever it’s needed most — and doing it fast.

Patrick Stokes, EVP and GM of platform at Salesforce, says this is probably the biggest news coming out of Dreamforce this week. “Genie effectively enables the world’s first real-time CRM,” he said.

“So we’re announcing that our Customer 360 applications — sales, service, commerce, marketing, everything in our Customer 360 portfolio — now have access to an entirely new way of bringing data into Salesforce in real time at scale that we’ve never been able to achieve before. And with that, our users can orchestrate real-time customer experiences against those datasets,” Stokes explained.

Prior to this, the company had built data integrations based on the transactional data in the Salesforce CRM database. This goes back to 2007 when Salesforce announced plans for Force.com at that year’s Dreamforce. Stokes said Genie is the modern equivalent of that early attempt, using a data lake that the company built to store the data instead of a transactional database.

“We connected this lakehouse architecture to the Salesforce platform, which at the technical layer means literally, we taught it Salesforce metadata, which is the way that all of our services talk to each other.” This approach also allows the platform to work with external services and data repositories, as well. In fact, the Snowflake integration the company announced last week is built with this technology.

But Genie is more than just a data integration layer. By allowing data to flow faster and more freely, it opens up all kinds of automation possibilities, especially when you combine it with Einstein for AI and machine learning and Salesforce Flow, the company’s workflow tool.

“If your platform can suddenly talk to all of this new data, and that data is coming in in real time, then you can use our automation layer like Salesforce Flow to orchestrate workflows or automations in real time, but only if the platform can keep up with the speed of change and volume of data that’s coming in,” he said.

Part of the ability to go faster beyond the architectural changes at the software level is that Genie is running on Salesforce’s own cloud infrastructure, Hyperforce, which was announced in 2020 as a way to move data from Salesforce to the public cloud. In this case, they are using it to move data between Salesforce and other services, both on the platform and to other data sources like Snowflake or Amazon SageMaker.

He adds that this ability to move data around in real time (or near real time), creates what is essentially a customer data graph.

“When you connect all of these different data sources into Genie, be those directly or other data lakes like Snowflake, what you’re doing is you’re modeling the data. You’re basically hooking it up to a data model. And when you do that, you’re creating a graph of how all that data is related to each other, independent of where it lives in a particular system of record, which is incredibly powerful,” Stokes said.

Liz Miller, an analyst at Constellation Research, says the shift to a new data model is a much-needed move for the company by pushing the CDP beyond marketing

“Honestly the thing I find most important about this is that Salesforce is moving in the right direction with their vision of a customer data platform. They are not treating a CDP as if it is a marketing toy for marketing things. Instead, they are turning the CDP into a foundational layer of unified, normalized and persistent personalization and smart segmentation that benefits the entire customer experience front line across sales, service and marketing,” Miller told TechCrunch.

Sheryl Kingstone, an analyst at S&P Global Market Intelligence, who has been covering the CRM space for years, agrees, saying the key to this change is building the data mechanism in a way that you can share this valuable data more widely.

“They are really focused on building this as part of what I would say is a true platform with all of the assets that this needs to work, and hopefully, it will create what I call a ‘customer intelligence platform,’ which makes sure that you don’t have multiple different CDP silos. And we finally can have that single source of the truth and execute on it.”

The combination of tooling has the potential to be able to make things happen based on the data and the situation without requiring human intervention, and that can be powerful. But Kingstone says the human side still matters and companies have to learn to put data in the hands of the people on the ground working with customers.

That’s going to be a huge challenge, regardless of how sophisticated the technology is, but Salesforce is attempting something big here that’s never been done before by changing the way data moves around the platform. Whether that truly leads to better customer experiences, online and in person, however, remains an open question.

Unlike many Dreamforce announcements, customers don’t have to wait until next year for Genie. These new capabilities are available now.

Salesforce Chair and Co-CEO Marc Benioff and his team are serious about expanding profit margins after years of making big acquisitions of Mulesoft, Tableau, and Slack.

"For us, I think that the market doesn't fully appreciate how committed we are to growth and margins," Benioff told Yahoo Finance Live at the software giant's Dreamforce conference in San Francisco before reeling off several latest initiatives by the company.

Benioff also didn't rule out making large deals in the future, echoing the sentiment of Salesforce Co-CEO Bret Taylor, but he did point to two ambitious targets the company announced at the conference.

Salesforce committed to a 25% operating margin by calendar year 2025, the first time Salesforce has committed to a public operating margin target. If hit, it would mark a notable increase from 2022's goal of 20.4%.

The company also expects sales to hit $50 billion by 2025, a huge increase compared to Wall Street estimates of $31 billion for this year.

“We want to grow our revenues,” Benioff said. “We want to increase our margins. We want to increase our market share. We want to increase our levels of customer success. We want to bring people together. It’s all related.”

Overall, investors on the ground at the conference responded positively to the news.

"A quickening pace of innovation on the product side, more detailed views of large opportunities within the customer base, strong commitments to improving efficiency, and a rising focus on shareholder value point to a durable 25%+ EBIT CAGR and work to Improve investor confidence in those targets," Morgan Stanley Analyst Keith Weiss wrote in a note to clients.

Salesforce showed "solid progress down the road to rebuilding investor credibility," Weiss added. "At the 2022 investor day, the Salesforce management team took investor debates head on, well addressing core areas of concern."

Weiss reiterated a buy-equivalent Overweight rating on Salesforce stock with a $273 price target.

Story continues

Goldman Sachs analyst Kash Rangan also struck an upbeat note on Salesforce following his time at Dreamforce. The analyst predicts Salesforce's operating margins could break through 30% by calendar year 2026.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

Click here for the latest trending stock tickers of the Yahoo Finance platform

Click here for the latest stock market news and in-depth analysis, including events that move stocks

Read the latest financial and business news from Yahoo Finance

Download the Yahoo Finance app for Apple or Android

Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, and YouTube