We attended Salesforce’s (CRM) financial analyst day as part of the firm’s annual Dreamforce event, where we heard more about the firm’s path to $20 billion in revenue, partnerships to drive growth, and the evolution of the company’s margin trajectory. Management’s initial outlook for fiscal 2019 sales incorporated our prior above-consensus estimate at the high end of the range, and we believe Salesforce remains poised to capture additional market share as spending for customer relationships management applications continues to move toward cloud-based applications. We are maintaining our wide moat rating. We were surprised to hear management issue a long-term revenue target of between $20 and $22 billion in fiscal 2022 via organic growth, which tracks ahead of our expectations. Given the competitive dynamics at play in Salesforce’s end markets, improving dollar attrition rates, and international expansion levers that remain, we feel comfortable moving our longer-term base-case sales estimates in the direction of our bull-case trajectory (which had implied sales in management’s target range). As a result, we are lifting our fair value estimate to $131 per share, and we continue to view shares as undervalued today.
One of the key drivers to our valuation of Salesforce remains the eventuality of enhanced operating leverage. We have long believed that much of Salesforce’s margin expansion story is in fact structural; as long as customer retention remains high, leverage will come as growth slows and a higher mix of billings come from the renewals cohort. Encouragingly, management drove this message home repeatedly during Dreamforce, noting that the bulk of management’s margin expansion targets can be achieved via this dynamic alone. While we expect Salesforce will increase operational efficiency longer term to help extract incremental profitability, we think management’s long-term adjusted operating margin target of 35%-plus remains more than achievable.
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