Salesforce.com

CRM : NYSE : US$55.51
BUY 
Target: US$65.00

COMPANY DESCRIPTION:
14-year-old Salesforce.com sells cloud computing and social enterprise solutions for businesses that range from Enterprise to SMB. The firm’s core products include Sales Cloud (sales automation), Service Cloud (customer support applications), Marketing Cloud (marketing tools), Force.com (a development platform) and Chatter (enterprise collaboration).

Technology — Enterprise Software — Software as a Service
SOLID ACROSS THE BOARD. STOCK SETS UP WELL FOR 2014. INCREASING TARGET TO $65.Investment thesis
Numbers-wise, CRM posted strong results  More importantly, we believe the bias to estimates remains to the upside, especially if ExactTarget continues to exceed the implicit contribution embedded in management’s outlook opinion. Stock-wise, Salesforce is our favorite large-cap growth name because if 2013 was about Growth At Any Price, we expect 2014, with the specter of rising rates, will force investors to pay at least some attention to growth plus cash flow margins. On that basis, CRM’s F2014 33% revenue growth plus roughly 14% FCF margin puts the firm in the top decile of cloud companies.

Finally, the valuation, in a market of expensive stocks, isn’t too egregious at 7.0x revenues and 50x EV/FCF on our C2014E numbers. Let this stock ride.
Investment highlights
 A very solid quarter. CRM reported Q3/14 revenues and non-GAAP EPS of $1.076B and $0.09, which were respectively $21M ahead and in-line with our estimates. Revenues grew 34% in the quarter, the upside being driven largely by a better-than-expected quarter in terms of ExactTarget contribution. Calculated billings grew 37% in the quarter to $1.02B and the firm’s off balance sheet backlog was up  40% at $4.20B. YTD FCF of $604M is up roughly 33% y-o-y.
 Outlook:

Q4 revenues a bit better than expected, preliminary F2015 in-line. CRM guided for midpoint Q4/14 revenues that were roughly $9M ahead of our estimates and in-line non-GAAP EPS. The firm’s preliminary F2015 revenue outlook bracketed consensus and implies mid-point revenue growth of 28%. We have set our revenue estimate at the high-end of the outlook range ($5.2B) and have assumed roughly 270bps of operating leverage, implying non-GAAP margins of
11.2% (back to pre-ET levels).

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