RBC’s Jaluria says Salesforce is a ‘core SaaS holding’

on Aug 26, 2021
  • RBC Capital Markets' Rishi Jaluria initiated coverage of Salesforce's stock with an Outperform rating.
  • The analyst notes that Salesforce stock should be considered a 'core SaaS holding'.
  • CRM trades at 60 times EV/CY22E FCF which is a discount to its large-cap peers.

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RBC Capital Markets assumed coverage of Salesforce.com Inc (NYSE: CRM) with an ‘outperform’ rating on Thursday after the American cloud-based software company reported market-beating results in its second-quarter earnings report.

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The research firm’s Rishi Jaluria initiatied coverage of Salesforce’s stock with an Outperform rating and $310 price target. The analyst wrote in the report:

“We like Salesforce as a core SaaS holding, given its market leadership position in multiple areas, a broader platform with the potential to consolidate IT spend, and multiple growth drivers.”

4 bullish takeaways from Salesforce’s Q2 report

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RBC’s coverage immediately follows Salesforce’s earning report that is highlighted by a 23% year-over-year increase in revenue at $6.241 billion while EPS of $1.48 handily beat estimates of 93 cents per share. Aside from the solid beat, Jaluria’s note includes four other takeways from the earnings report and conference call that justify an Outperform rating.

First, Non-GAAP operating margin of 20.4% beat the consensus estimate of 18.2%. The outperformance was driven by strong revenue, ongoing trends in remote and hybrid work, and operational discipline.

Second, Salesforce closed the acquisition of Slack in late July and management confirmed a “fast start to integration” and investors can expect further updates at Salesforce’s Dreamforce event. The analyst wrote:

We have been close followers of the Slack story over the years and are bullish on the asset on multiple levels including opportunity for cross-sell and even greater
exposure to digital transformation tailwinds.

Third, current remaining performance obligation (CRPO) was 23% higher year-over-year at $18.7 billion versus management’s own expectations for 20% growth. The company is now modelling the Slack integration to add four points of growth which marks an improvement from prior estimates of 3 points.

Finally, Salesforce revised its guidance higher, including year-over-year revenue growth of 23% to 24% (versus 22% prior) and for Non-GAAP operating margin to be around 18.5% versus a prior outlook fo 18%.

CRM stock trades at a discount

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Salesforce’s stock is up more than 250% over the past five years but the stock still has upside potential moving forward. At current levels, CRM stock is trading at just 60 times EV/CY22E free cash flow which is a discount compared to its large-cap peers. Jaluria’s $310 price target implies a multiple of 71 times which is a “less meaningfull discount” that reflects Salesforce’s market leadership and growth drivers. The analyst wrote:

Stepping back, we like Salesforce as a core SaaS holding, given its market leadership position in multiple areas, broader platform with potentialto consolidate IT spend, and multiple growth drivers, although we do have concerns around the current margin structure.

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