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What Makes Salesforce A Hot Pick For Investors Right Now?

Published 04/04/2018, 09:50 PM
Updated 07/09/2023, 06:31 AM

The first quarter of 2018 was a bumpy ride for the overall technology sector, thanks to the slew of bad news, which includes the Russian hacking of computers at the 2018 Olympics, data misuse scandal at Facebook (NASDAQ:FB), and the first casualty by a driverless car. Despite a highly volatile market, Salesforce.com, Inc. (NYSE:CRM) is one such technology stock which marked a remarkable run in the first quarter of 2018.

In fact, Salesforce’s shares appreciated 13.8% in Q1, substantially outperforming 5.4% growth recorded by the industry. The Technology Select Sector SPDR ETF’s XLK return was just 2.3%, and all major indices, including Dow Jones Industrial Average, NASDAQ Composite and S&P 500, ended the quarter in red. In the year-to-date period, the stock has gained 16.9%.

Salesforce is the fastest growing enterprise software company, which in fiscal 2018, achieved the milestone of $10-billion sales mark. Furthermore, looking at the company’s strong fundamental growth drivers, we are confident of its ability to reach the long-term target of $20-$22 billion in revenues by fiscal 2022.

Therefore, we believe the company has huge growth potential and investors should stay invested in the stock for better returns. Let’s look at the reasons behind this optimism.

Acquisitions Driving Revenue Growth

Acquisitions have always been one of Salesforce’s key growth strategies. Over the last two years, the company has closed or was in the midst of as many as 16 acquisitions, worth billions of dollars, including its latest biggest-ever buyout agreement — MuleSoft. These acquisitions have strengthened its position in the customer relationship-management solution-providing space. We expect the acquisition synergies to drive Salesforce’s top-line performance in the quarters ahead.

Partnerships Stoking International Growth

Salesforce still generates only about 30% of total revenues from international operations, which is much lower than its rivals like Microsoft (NASDAQ:MSFT) or Oracle (NYSE:ORCL) composition of around 50%. Nonetheless, the company noted that its partnership agreements with Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL) for the firms’ cloud services have been helping it expand its international operations.

Earlier, the company used to run its software at its own data centers which had been curbing its growth potentials. However, in 2016, the company decided to utilize the geographical reach of other data-center service providers in a bid to expand its international business.

The company’s first partnership in this space was with Amazon Web Services in 2016, followed by the next alliance with Alphabet last November. During third-quarter fiscal 2018, the company won several deals due to its international-expansion initiatives. Companies like National Australia Bank, BP (LON:BP), Group PSA and Hitachi picked Salesforce’s solutions to fuel digital transformation. It is most likely that the company will continue winning international deals which will drive its top- and bottom-line results over the long run.

Partner Program Adding Customers

Tremendous growth in Salesforce partner certifications has been fueling the company’s top-line results. Notably, Salesforce’s partner certification has witnessed five-time growth over the last four years and more companies are willing to invest in Salesforce activities. Accenture has emerged as one of the biggest examples for this. Notably, Accenture is currently a global leader in the Salesforce implementation service space, with more than 11,000 skilled consultants.

Notably, a number of big organizations, including Siemens, ABB, Deutsche Bahn and BBVA (MC:BBVA) became Salesforce’s partners during fourth-quarter fiscal 2018. We expect the trend to continue which will drive its overall financial performance.

Bottom Line

Given the solid fundamental growth drivers, we consider that Salesforce is one such technology stock which is worthy of remaining in investors’ portfolio. The stock has grabbed the spotlight with its striking performances on the back of solid earnings results and robust growth projections. Keeping this in mind, we perceive that investing in this stock will yield higher returns. Long-term expected EPS growth rate for the stock is currently pegged at 24.2% which is substantially higher than the industry average of 12%.

Currently, Salesforce has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

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