Investors are concerned about Salesforce.com, inc.'s CRM stagnant margins, M&A dilution and decelerating organic growth. But Morgan Stanley sees a path to double revenues by 2023.
The Rating
Morgan Stanley analysts Keith Weiss and Stan Zlotsky maintained an Overweight rating on Salesforce with a $180 price target.
The Thesis
The analysts expect Salesforce to continue expanding its empire in the long term.
“With our partner checks indicating favorable competitive positioning and healthy customer demand trends across Salesforce's product portfolio, and enterprise IT spend focused on digital transformation, Salesforce remains one of the best secularly positioned names in software and a long-term share gainer within an estimated $200B+ Total Addressable Market (TAM),” Weiss and Zlotsky wrote in a note.
They suspect investors will share their optimism if management addresses three points in the upcoming Investor Day presentation.
The first is the “durability of 20%+ organic revenue growth in the face of an uncertain macro environment, large and maturing solution segments (e.g. SFA) and highly competitive end markets.” Demand for Marketing, Service Cloud and Mulesoft are expected to drive such growth.
The second factor is the company’s potential to sustain meaningful operating margin expansion after attending to recent acquisition costs. Morgan Stanley expects a convergence in Tableau and Salesforce margins next year, with synergies manifesting by 2021.
The third factor is Salesforce’s M&A strategy — a major concern for margin-conscious investors.
“We expect the pace of large M&A is likely to slow down into FY21,as management focuses on harvesting acquisitions made this year,” the analysts wrote. “However, we think a further pullback in broader software valuations could lead to an increased M&A appetite,as Salesforce attempts to acquire strategic assets at an attractive price.”
Price Action
At time for publication, Salesforce shares traded up marginally around $163.
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