Is This Stock Immune to a Recession?
We have officially entered a bear market and the odds are we haven’t hit bottom yet. With a recession on the horizon, how should you allocate your money?
While high growth technology stocks have been hit hard, other bellwether tech stocks may be somewhat immune to a recession. How is this possible? In a word: moat. A business with a moat has an enduring competitive advantage and that usually translates to premium pricing and customer loyalty. One company that ranks well on those criteria is Salesforce.
Salesforce (NASDAQ:CRM) was founded in 1999 and has since grown into a $160+ billion company. This cloud-based software company offers customer relationship management software and applications that focus on marketing automation, customer service, sales, application development, and analytics.
Thanks to Salesforce’s software, companies can break down the technology silos between departments, providing a complete view of their customer wherever they interact with their brand. This holistic view has been a game-changer, and Salesforce is just getting started.
CRM Growth Has Been Stellar
In 2003, Salesforce reached nearly $100 million in revenue. Within 6 months, the company had completed its initial public offering (IPO), raising $110 million at $11 per share. By November 8, 2021, shares of CRM hit the all-time highs north of $300 per share. Keep in mind a 4:1 CRM stock split also took place in 2013.
Salesforce joined the Dow Jones Industrial Average in August 2020. By then, it had soared 6,200% since its 2004 IPO. But since its addition, Salesforce’s stock has lagged. The company has struggled to sustain any price traction — but that may be changing. Salesforce may regain its momentum, and here’s why.
A Glimpse of Hope for Salesforce Investors
On May 31, 2022, Salesforce announced strong first-quarter fiscal 2023 results. Revenue was $7.41 billion, up 24% year-over-year; operating cash flow was $3.68 billion, up 14% year-over-year; and management updated FY23 guidance to $31.7 billion-$31.8 billion, up approximately 20% year-over-year.
The following day, CRM stock jumped nearly 10%, giving investors hope for the future.
Although the company’s recent financials are impressive, Salesforce expects a combination of product evolution and market expansion to drive further growth. It expects the market will grow to $284 billion by 2026. And the Salesforce Customer 360 platform now spans well beyond its CRM roots, offering a wide spectrum of services. Customers are looking to Salesforce for more than sales- and service-related products.
Salesforce Has a Promising Future
The fears surrounding rising interest rates and inflation are not unique to Salesforce. Regardless, this industry leader is poised to prosper thanks to its wide moat. The friction for any customer to leave Salesforce, once onboarded, grows with each incremental data record added the client’s marketing platform.
Certainly, Salesforce’s revenue and historical growth is impressive. But the company’s long-term potential could be even greater. There is plenty of room for Salesforce to grow even larger and more influential. As the company and its primary market expands, it is becoming more profitable, and steadily improving its operating margin.
Salesforce will benefit from the many technological trends ahead. The company is a current leader, enabling digital transformation on a global scale and allowing businesses to transition to the cloud while digitalizing their processes. In doing so, Salesforce is becoming an increasingly crucial partner to thousands of companies. By investing aggressively in artificial intelligence (AI) and machine learning (ML), Salesforce will continue to adapt, evolve and thrive regardless of the economic climate.
Is Salesforce Immune to a Recession?
No company is “immune” to every economic environment but Salesforce should navigate choppy waters if a recession hits and, when the dust settles, will likely reward its investors handsomely.
The company has already proven itself during times of economic downturn, and this stretch of hardship will not likely be any different. Some analysts even say that Salesforce will become more relevant as companies turn to digital technology to boost productivity and cost savings.
Examining the company through the lens of valuation, it has 43.7% upside to $242 per share based on a calculation of its cash flows.
