- Salesforce announced at its investor day last month that it plans to double the company in the next five years, but industry watchers say that growth may be more difficult to reach than expected and is heavily dependent on more large acquisitions like Tableau and MuleSoft.
- Growth in Salesforce’s flagship Sales Cloud business has been slowing as the company continues to expand in size.
- “While the company has a strong track record of buying and integrating good businesses, for an acquisition to have a material impact on the business at the current run rate, it would have to be large. This opens the door to riskier deals that present greater integration risk,” Rob Oliver, senior research analyst at Baird Equity Research writes.
- One big problem with relying on M&A to grow revenue is that it will weigh on margins, analysts say. And Salesforce needs to be careful about over-spending on deals.
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One of Salesforce’s most reliable playbooks— mergers and acquisitions — will be put to the test like never before as the company strives to meet its CEO’s ambitious growth targets, according to analysts.
Marc Benioff, the cloud software giant’s voluble founder, recently declared that Salesforce will generate $35 billion in revenue by its fiscal year 2024, roughly double the current level.
The feat would make “us the fastest enterprise software company to reach that milestone,” Benioff said on an earnings call with investors Tuesday, re-iterating the target he had set a few weeks earlier at the company’s annual Dreamforce conference.
Analysts say the only realistic way for Salesforce to get there is to buy growth by acquiring other companies. And while that strategy has served Salesforce well for years, the risks will become bigger than ever as the stakes grow higher.
“While the company has a strong track record of buying and integrating good businesses, for an acquisition to have a material impact on the business at the current run rate, it would have to be large. This opens the door to riskier deals that present greater integration risk,” wrote Baird Equity Research analyst Rob Oliver in a note to investors following the company’s earnings results.
With a relatively modest $6.5 billion of cash on its balance sheet, Salesforce needs to be careful how its spends its money.
“If Salesforce does not exhibit spending discipline, over-payment for strategic acquisitions could be dilutive to earnings,” warned Wedbush analyst Steve Koenig in a note to investors.
A slowdown in the flagship business and a potential hit to margins
Growth in Salesforce’s flagship Sales Cloud business has been slowing as the company continues to expand in size. While other core products like Service Cloud and Marketing Cloud are continuing to grow, acquisitions are providing the biggest boost to the company’s top line.
This past quarter, Salesforce completed its acquisition of data analytics and visualization company Tableau— the largest acquisition in the company’s history at $15.3 billion dollars. This was just a year after it acquired MuleSoft for $6.5 billion. Both acquisitions are already bolstering Salesforce’s revenues, although the company’s plan for integrating Tableau is still a bit murky.
Salesforce brought in $4.5 billion in revenue for the quarter. Tableau contributed $308 million of that, above the $300 million Wall Street expected. This led Platform and Other revenue to grow 74 percent in the quarter. MuleSoft also had a strong quarter, and re-accelerated to 77 percent subscription growth, up from 61 percent growth last quarter.
The biggest risk with relying on acquisitions to grow revenue is that it will weigh on margins, Matt Lemenage, senior associate at Baird, told Business Insider.
“Investors biggest pushback with CRM over the past 12-ish months have been that margins haven’t expanded in nearly 3 years,” Lemenage said, referring to Salesforce by its stock ticker. “The ‘problem’ is that acquiring these large companies comes with incremental expenses and therefore margins have stayed flat to do rather than expanding”
He adds that Salesforce has promised investors between 1.25% and 1.5% adjusted profit margin expansion every year. But for the past few years it hasn’t come. “Hence the investor frustration,” Lemenage said.
“We expect more acquisitions to supplement organic product development”
Analysts at RBC Capital Markets warn against investing in order to drive growth. “To us, a more dangerous path would be to invest in an attempt to drive growth. If unsuccessful, the resulting growth deceleration coupled with deteriorating margin and cash flows could be very negative for the stock,” writes Alex Zukin, an analyst at RBC Capital Markets.
Products like Service Cloud, Marketing Cloud and Platform are becoming more important to the company’s growth going forward. And given Salesforce’s history of successful acquisitions, analysts are still optimistic in the long run.
Marketing Cloud in particular has seen success in continuing to grow and build out functionality by using acquisitions, said Rob Oliver at Baird. These include deals like Radian6, BuddyMedia, and DemandWare. “We expect more acquisitions to supplement organic product development,” Oliver writes.
Arjun Bhatia, an analyst at William Blair, sees less risk. He points to Salesforce’s success with MuleSoft and the Tableau’s prospects as a good sign for reaching its goal of doubling the company by 2024.
“Salesforce has a strong record of integrating acquisitions and generating inorganic growth (as we saw with MuleSoft), which leads us to believe there is upside to Tableau numbers in the fourth quarter,” Bhatia writes. “We have a positive outlook on the company’s ability to reach its fiscal 2024 target of $35 billion in revenue, essentially doubling the company from current levels.”
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