By: Tom Taulli
Salesforce.com, Inc. (NYSE: CRM ) has had a fantastic 2017, up 25% for the year-to-date. And that continued Wednesday after analysts at Merrill Lynch put shares on its coveted list of top buys.
On the news, CRM stock is up about 3%. In fact, for the year so far, the return is an impressive 20%, roughly.
There are plenty of reasons to be upbeat on CRM stock. The company is the pioneer of the fast-growing cloud computing industry and has a broad array of applications that go beyond customer relation management, such as marketing automation, hosting, customer service and analytics.
Even though CRM has been around since the late 1990s, the company is growing as if it were a scrappy startup. In the latest quarter, revenues jumped by 27% to $2.29 billion and cash flows came to $706 million, up 50%. Deferred revenues also rose by 29% to $5.54 billion.
As for the Merrill report on CRM stock? The analysts point out that revenues could double within the next three to four years. The main reason is the Einstein platform, which provides sophisticated AI (Artificial Intelligence) across the company’s apps.
AI and CRM Stock
Here’s what CRM CEO Marc Benioff had to say about the cutting-edge Einstein technology in the latest earnings call :
“We showed [a customer that] with a simple camera, they’re able to do real-time inventory analysis of their retailer shelves and they’re able to, based on that analysis that’s happening from those cameras, understand the competitive environment, number one. Number two, understand their own environment, and number three, when they are seeing a level of depletion on the shelves that they want to replace, they can just roll trucks automatically using Salesforce Einstein.”
While all this sounds great, there should still be some skepticism. AI is definitely not exclusive to CRM. Many other mega tech operators – like Microsoft Corporation (NASDAQ: MSFT ), Alphabet Inc (NASDAQ: GOOGL , NASDAQ: GOOG ) and Amazon.com, Inc. (NASDAQ: AMZN ) – are plowing huge amounts of resources into the category.
These companies also have the key advantage of huge consumer user bases, which allows for more learning. Offerings like Alexa, Cortana and Google Assistant are quickly becoming well-known brands in AI. This is definitely not the case with Einstein.
But there are some other things to consider.
The competitive environment for cloud computing is getting more intense – and will likely see more pricing pressure. Even Salesforce’s core customer relationship management business has a few vulnerabilities.
Keep in mind that Microsoft’s $26.2 billion acquisition of LinkedIn will provide a big boost to the company’s own CRM platform, which include Dynamics and Sales Navigator.
The massive amounts of LinkedIn user data – which boasts more than 467 million users – will be key for AI functions. Plus, LinkedIn will enjoy powerful synergies with other MSFT products like Office, Skype, SharePoint and Azure hosting.
Is it any wonder that Benioff said that the LinkedIn/Microsoft deal was “anticompetitive” ?
Microsoft may ultimately be the biggest threat to the growth of CRM stock. Perhaps this is why there were discussions for a merger a couple years ago .
Since then, CRM has engaged in an aggressive M&A campaign to remain competitive. For the past year or so, the company has acquired 11 companies . Some also sported high price tags, such as the $750 purchase of Quip and the $2.8 billion deal for Demandware . It can be extremely difficult to integrate multiple deals in a short period, as you risk problems with staffing, sales productivity and product quality.
Finally, CRM stock is trading at steep levels, with the forward price-earnings ratio at a hefty 50X. By comparison, Microsoft has a multiple of only 20.
Despite what Merrill says, you may want to wait for a better price on CRM stock before putting it on your own conviction list.
Tom Taulli runs the InvestorPlace blogIPO Playbook as well as OptionExercise.com , which provides interactive tools & services for employee stock options of pre/post IPO companies. Follow him on Twitter at @ttaulli . As of this writing, he did not hold a position in any of the aforementioned securities.