Is Salesforce's Stock Overvalued Or Undervalued

Salesforce.com, inc. CRM shares have lagged the S&P 500 in 2021, generating a year-to-date total return of just 13%.

Salesforce stock has had a wild ride in recent years, but investors may be wondering whether there’s any value in Salesforce shares after the recent pullback.

Earnings: A price-to-earnings ratio (PE) is one of the most basic fundamental metrics for gauging a stock’s value. The lower the PE, the higher the value.

For comparison, the S&P 500’s PE is currently at about 29.4, nearly double its long-term average of 15.9. Salesforce’s PE is 99.7, more than three times higher than the S&P 500 average as a whole.

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Growth: Looking ahead to the next four quarters, the S&P 500's forward PE ratio looks much more reasonable at just 20.8. Salesforce’s forward earnings multiple of 54.0 is still more than 150% higher than the S&P 500’s, making Salesforce look overvalued.

Salesforce’s forward PE ratio is also nearly double the average multiple of its technology sector peers, which are averaging a 27.8 forward earnings multiple.

Yet when it comes to evaluating a stock, earnings aren't everything.

The growth rate is also critical for companies that are rapidly building their bottom lines. The price-to-earnings-to-growth ratio (PEG) is a good way to incorporate growth rates into the evaluation process.

The S&P 500’s overall PEG is currently about 1.0; Salesforce’s PEG is 9.2, suggesting Salesforce is still extremely overvalued after accounting for its growth.

Price-to-sales ratio is another important valuation metric, particularly for unprofitable companies and growth stocks. The S&P 500’s PS ratio is currently 3.19, well above its long-term average of 1.63. Salesforce’s PS ratio is 10.5, triple the S&P 500 average as a whole.

Salesforce's PS ratio is also up 69.7% over the last five years, suggesting the stock is priced at the high end of its historical valuation range.

Finally, Wall Street analysts see value in Salesforce stock over the next 12 months. The average analyst price target among the 44 analysts covering Salesforce is $330, suggesting 31.2% upside from current levels.

The Verdict: At its current price, Salesforce stock appears to be extremely overvalued based on a sampling of common fundamental valuation metrics.

Photo: courtesy of Salesforce.