CRM

Publicly traded companies mentioned herein: Adobe Inc (ADBE), Intuit Inc (INTU), Microsoft Corp (MSFT), Salesforce Inc (CRM)

Highlights

The presenter is long shares of Salesforce Inc (CRM), which he views as the premier front office software provider. The stock peaked at ~$300 in Q4’21 before falling >50% by the end of 2022 based on the “tech recession” and a revenue deceleration. Activist investors started targeting CRM in Q4’22, causing CEO Marc Benioff to quickly shift the company’s strategy. He publicly cut 10% of CRM’s workforce along with additional steps to facilitate further reductions. This drove operating margins from 22.7% to 31.2% in four quarters, allowing the stock to double. While the stock price doubled, the improvements in CRM’s EPS multiple and FCF yield have been much less significant given the massive margin expansion. It remains much cheaper than comps, as it trades at ~24x his forward FCF compared to INTU, MSFT, and ADBE all trading at 30x+. Looking forward, the Street still seems too low on margins over the next two years, forecasting operating margins stagnating in the low-30% range compared to his 32% – 33% exit rate in CY2024 and 200bps of expansion in CY2025. He also expects topline acceleration to 13% – 14% vs. consensus that remains at 11%. Putting this all together, he models $14 of FCF per share in CY2025 and sees >50% upside to $420 per share based on a 30x FCF valuation.