I recently started a position in Salesforce (NYSE: CRM) because the price the market is giving investors is too good to ignore. Timing can be everything when investing, and there has seldom been a better time to purchase the stock in the last few years.
In a market where some stocks are incredibly expensive, Salesforce is refreshing. If you have a holding period of at least three to five years in mind, there are few better stocks available.
An industry leader
The company is a leader in customer relationship management (CRM). This software helps a company market its services or products to potential buyers, make the actual sale, retain and serve the customer post-purchase, and drive additional purchases.
Like everyone else, it seems, Salesforce has also been heavily integrating generative artificial intelligence (AI) into its product line. It calls its model Einstein, and it can be used both internally and externally by a company.
For internal use, employees can ask the AI questions about a client to learn more about them, making their sales pitch or marketing technique more productive. For external use, Einstein can be used to create better chatbots to deal with product inquiries or issues.
Salesforce is by far the market leader in CRM software, and its new AI tools further solidify that position. When investing in a company that is already the market leader in a fairly mature industry, growth rates and the purchase price are very important, which is why now is an excellent time to buy.
Profitability is improving
Salesforce used to be barely profitable, although it flipped the switch last year.
CRM profit margin (quarterly); data by YCharts.
However, compared to other software-as-a-service companies, it has a way to go. The industry standard in this space is Adobe, which has achieved a 30% profit margin for many years.
While it's unknown if Salesforce will reach that level, there is potential. So the company's profits will grow much faster than revenue over the next few years, because its profit margin should be ticking up. This is good; its revenue growth isn't lightning-quick.
For fiscal year 2025 (ending Jan. 31, 2025), Salesforce maintained its full-year revenue guidance of 8% to 9% growth. However, the stock was heavily sold off following the earnings release because management issued guidance for 7% to 8% growth in the second quarter, which was below expectations.
If you can broaden your time horizon from one quarter to one year, this 20% sell-off makes no sense, so I took advantage of it and bought the stock. After the sell-off, it now trades for a fairly cheap valuation.
Salesforce hasn't been this cheap from a price-to-sales (P/S) basis in about nine months. And 6.7 times sales for a software company is pretty cheap, especially compared to industry giants like Adobe (11.9 times sales) or Autodesk (9.3 times sales).
CRM PS ratio; data by YCharts.
From a forward price-to-earnings (P/E) perspective, Salesforce trades at 24.8 times earnings. Considering that the broader market (measured by the S&P 500) trades at 22.3 times earnings, it barely holds a premium to the market.
Considering the company's long-term success, this seems like a great price to pay for the stock. Salesforce has been on my radar for a while, but the latest sell-off finally gave me a reason to take a position in it. I'm confident that this discounted price will allow me to beat the market over the next three to five years.
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Keithen Drury has positions in Adobe, Autodesk, and Salesforce. The Motley Fool has positions in and recommends Adobe, Autodesk, and Salesforce. The Motley Fool has a disclosure policy.
