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A Salesforce to be Reckoned With

By:

Senior Market Analyst at Interactive Brokers

Market participants generally foresee a boost to cloud-based software company salesforce.com’s (NYSE: CRM) stock Tuesday following the release of its latest quarterly financial results after the closing bell.

Salesforce, a San Francisco-headquartered Customer Relationship Management (CRM) firm, enables institutions to exploit advanced technologies such as cloud computing, the Internet of Things (IoT), artificial intelligence (AI) and blockchain to achieve holistic customer profiles.

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Through several acquisitions, including its recent US$15.7bn all-stock purchase of Tableau Software and an estimated US$6.5bn for MuleSoft, the company aims to generate between US$16.75bn-US$16.90bn in its fiscal year 2020 – representing growth of around 26-27%, including roughly US$550m-US$600m in sales from Tableau.

Moreover, Salesforce has reportedly set its sights on doubling its organic revenue by fiscal year 2023 to achieve its target of US$26bn to US$28bn.

Moody’s analyst Richard Lane noted that combining Salesforce’s “leading customer relationship software platform with Tableau’s data analytics offerings makes good strategic sense as companies look to better integrate software platforms to gain more effective operational and customer insight.”

He added that as “data creation continues to explode, companies are deploying analytic software across their organizations to better understand and manage their operations.”

Moody’s maintained its investment-grade ‘A3’ credit rating on Salesforce, when the acquisition was announced on June 10, 2019.

Stock Force

According to financial data firm TipRanks, 18 industry analysts anticipate Salesforce’s shares to rise by an average of more than 19% based on 12-month price outlooks over the past 3 months. The average price eyed is US$191.53, with an expected range spanning US$175-US$210. 

Shares of Salesforce have soared about 31.85% from their most recent 52-week low of US$121.33 set on December 24, 2018, according to the IBKR Trader Workstation. Year-to-date in 2019, the stock has vaulted over 17.5%, contributing to growth in the Technology Select Sector SPDR Fund (NYSEARCA: XLK) – along with titans Microsoft (NASDAQ: MSFT) and Apple (NASDAQ: AAPL) – of a whopping 41.6%.

For Q3 FY2020, the firm anticipates revenue in the range of US$4.44bn to US$4.45bn, or 31% growth year-over-year, assuming intake of around US$300m from Tableau. Salesforce also expects to make a US$0.21-US$0.20 loss per share and non-GAAP diluted EPS of US$0.65-US$0.66. The figures compare to the company’s total Q2 FY2020 intake of US$4.0bn, a 22% rise over the same year-ago quarter, with GAAP EPS of US$0.11 and non-GAAP EPS of US$0.66.

At the end of Q2 FY2020, the firm’s total cash, cash equivalents and marketable securities amounted to US$6.04bn.

Adopting AI & Other Advances

Market participants widely attribute AI adoption as among the more effective trends bolstering the popularity of cloud computing, and which has helped Salesforce post a record US$31bn in U.S. Cyber Week digital sales – a rise of 15% over the prior year, despite a shorter holiday season.

Salesforce said that retailers leveraged advances in AI, mobile and social to get shoppers “to start early.”

The company, which helped retailers with personalized commerce, marketing and customer service experiences throughout Cyber Week, highlighted that AI-powered search and product recommendations accounted for up to 9% of digital orders, and shoppers that purchased products from these suggestions bought 12% more units per transaction across Thanksgiving and Black Friday compared to peers who did not.

Deloitte analysts David Schatsky, Amit Chaudhary and Amanpreet Arora pointed out in Deloitte’s On Cloud Blog that the “symbiosis between the cloud and AI is accelerating the adoption of both,” and by 2025, AI is expected to comprise as much as 50% of total public cloud services revenue.

Deloitte noted that many cloud vendors are “stoking demand for AI technology by offering tools and services that make it easier to develop, test, enhance, and operate AI systems without big upfront investments.”

“These include hardware optimized for machine learning, application programming interfaces that automate speech recognition and text analysis, automated machine learning modeling tools, and AI development workflow platforms.”

Against this backdrop, Salesforce chair and co-CEO Marc Benioff said during his company’s Q2 FY2020 earnings call that management is focused on AI capabilities via its Einstein, Salesforce Einstein and Customer 360 platforms.

“We’ve also made Einstein Voice and Einstein Vision available to every Salesforce app and these AI-powered capabilities are the future of the customer experience,” Benioff continued, adding that the Customer 360 vision is being provided to “top retailers,” for example, so that they can offer, whether in sales or service, e-commerce or marketing or app development, “the ability to be competitive.”

Mobile Surge

Meanwhile, Salesforce also touted that a “whopping” 73% of global digital traffic during U.S. Cyber Week came from mobile devices, up 7% year-on-year. However, mobile orders were “the real breakout star,” the form said, as buying reached 55%, a 5% rise from 2018, driving the most digital traffic and orders of any device.

Indeed, as mobile phone users have gradually penetrated and saturated the U.S. telecom market over the past decade, internet-based purchases appear to have risen in tandem.

An analyst at Statista recently observed that mobile devices have been gaining in importance in the shopping process.

During a February 2019 survey of U.S. mobile owners, Statista noted that 57% of respondents stated that they had used a mobile retail app to look for more information about a product or a service, and a further 51% had purchased something via mobile.

During Q1’19, 28.2% of all digital e-commerce dollars in the U.S. were spent via mobile devices, Statista added, with mobile retail spending amounting to almost US$39bn during that period.

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Added to the spikes in mobile usage, Salesforce noted that social buying through mobile also hit an all-time high — growing 41% since 2018 and making up 7% of mobile orders on the Wednesday before Thanksgiving, a peak day.

Shares of Salesforce were last down around 0.11% on the day Tuesday to around US$160.82, according to the IBKR Trader Workstation, outperforming the Technology Select Sector SPDR Fund (-1.31% to US$85.76) and the Global X Cloud Computing ETF (NASDAQ: CLOU) (-0.32% to US$15.57).

The CLOU ETF, which includes among its top holdings Paycom Software (NYSE: PAYC), Netflix (NASDAQ: NFLX) and Shopify (NYSE: SHOP), has returned 35.65% year-to-date in 2019.

Investors glued to the technology-media-telecommunications (TMT) sector will likely be paying close attention to numerous events this week and the next, including conferences hosted by Credit Suisse, Wells Fargo (where Salesforce is slated to attend Tuesday), Barclays and UBS.

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.

Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Disclosure: Author Security Holding: No Positions

The author does not hold any positions in the financial instruments referenced in the materials provided.

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