Salesforce Stock Looks Like a Steal

Salesforce’s CRM recent earnings report revealed 20% free cash flow (FCF) and 8% revenue growth YoY. FCF per share continues to increase, up 50% from last year to $11.78 per share, representing a P/FCF of only 21 at current price.

The company has made great progress of improving its profitability, expanding its operating margin from 0.2% in 2022 to 19% in the latest quarter in 2024. The share based compensation is also under control, for the trailing 12 months of the latest quarter, share based compensation is only counted for 26% of total FCF, compared to nearly 60% in 2022. The estimated fair value of the stock is $299, indicating a CAGR of 14.5%. Here are the assumptions for the DCF model:

• Latest TTM FCF $11.46 billion
• FCF growth rate of 10% (5YR avg of 28%)
• 0% Share dilution (5YR AVG 4%, but -1% in recent year)
• Future P/FCF of 25 (5YR avg 36.73)
• Discount rate of 10%

As you can see, I’ve marked down the future growth rate and price ratio by a lot, creating a margin of safety to compensate for my limited knowledge about the industry.

I believe Salesforce’s full suite of CRM software and integrations creates high switching costs for its 150k clients, with the majority of them being enterprises that have built complex processes around the software provided.

I personally like to invest small positions into interesting companies I’m not familiar with, like Salesforce, which really incentivize me to do in-depth research about the company. I plan to continue building up my position if the stock stays around its current price level and as I learn more about the company.

If you are interested in how I value stocks using the DCF model, be sure to check out this Youtube video where I walk you through the process step-by-step.

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DISCLAIMER: This post is the author's personal opinion only and none of it should be considered financial advice.