Episode 36 | The Future of Salesforce: Balancing Innovation and Revenue Growth

In Episode 36 of “Market News with Rodney Lake,” Rodney Lake, Director of the GW Investment Institute, analyzes Salesforce's current business performance. Salesforce’s management, led by co-founder Marc Benioff, receives high marks for its impressive gross margins of 77-80% and net margins of 17.5%, which are expected to increase. However, concerns remain about future revenue growth, especially as the company faces slowing sales and competition in the AI space. Despite these challenges, Salesforce’s balance sheet is strong, with $14 billion in cash and $11 billion in debt, reflecting a net cash position of $3 billion. Listen to learn more about Salesforce’s position as a market leader in CRM software and prospects for the future.

Transcript

Thank you for joining “Market News with Rodney Lake.” This is a regular program for the GW Investment Institute where we talk about timely market topics. I'm Rodney Lake, the Director of the GW Investment Institute. Let's get started. Welcome back to “Market News with Rodney Lake.” I'm your host, Rodney Lake. Welcome to the George Washington University School of Business right here in Duquès Hall in Washington, D.C.

Welcome back to the show. If you've been watching market news with Rodney Lake and if you're new. Welcome. And if you're listening on the podcast, of course. Welcome back and welcome if you're new there. All right. Today it's solo. So I'm probably going to be talking about a company. And I am. And we're going to be using the GW Investment Institute investment framework business, management, price valuation, and balance.

You talk about this company, this company is a company you've likely heard of, but maybe you don't really know it. If you've interacted with, you might know it. It's called Salesforce and the ticker is CRM. And this is principally a business-to-business company. They're based in San Francisco and we're going to jump into it. But as a reminder and disclaimers to follow as well.

But this is educational, entertainment purposes only. But we're going to use the framework that our students use and have used over 20 years. Our students manage about $10 million in endowment money. That's university money. And they have compounded well over time, about 14% for the ten year number. They're again, not advertising or advice, just letting you know the stats.

So our students have done a fabulous job using this framework for the most part. And identifying companies, monitoring those companies and making decisions based on that framework. And so again, business, management, price valuation, and balance sheet is the Investment Institute framework. And we're going to tackle CRM is the ticker for Salesforce today. So let's jump into it.

So first of all what the heck do they do? So they operate cloud-based software, customer relations management. That's the ticker CRM. So application software is is their business. So of all kind. And again if you're in a business and you know what a customer relationship management software system is, you have a sense of what they do.

They bought Slack, for example. And so they've certainly gotten into many more things. They have a lot of AI applications that are on their platform. But, you know, they're principally serving businesses, and their customer relationship management software and things beyond that, like slack as one example. In their universe. And so people are using it to help them manage their business, help them manage the relationships, interactions between them in their customers.

So this is important software for really any company, but again, principally a business-to-business solution here. Not really. You know, anybody that's going to buy this for personal use? I can't think of anyone. So but this is a business-to-business, you know, business. And this is what they do. All right, so that's the that's the business.

And now let's get some of the metrics for the business. And so when we talk about, okay, well, what, what's the market cap for this company? Well, this company is a fairly large company, $270 billion market cap. Again, this is not the trillion dollars market cap. When we talk about Apple, when we talk about Nvidia, when we talk about Microsoft, Amazon and these sorts of companies, that's not the case.

However, it is a large company, right? 270 billion is not a small company. And so and it's grown rapidly over time. And certainly people that were early investors in this company have done very well. So that is the market cap. Now let's jump into what what are the revenues look like for this company, to talk about the business? The revenue’s 131 this year, 2025, we're in early March here.

This is the last reported number we have. 37 billion, almost 38 billion in revenue. For the last 12 months, we're talking, gross profits of 77%. And so when we talk about companies and we've talked about other software companies, other application businesses where this is really delivered mostly over the internet, the probability is that they're going to have high gross margins.

So let's drop down to the net margins. And again, 77% is excellent. Projected to actually go up a little bit for 26 and 27 to 80%. Those are again, you're talking about people that are in that category, are for example, Visa, CrowdStrike, Fortinet, which we've talked about, Nvidia as an example. And so these are really, really a class of companies on their own that have these really high gross margins.

Now, when we get down to the net margins more a little more pedestrian, 17% net margins, but that has been increasing over time. If you look at the net margins for the ticker CRM sales force over time in 2022, you're looking at net margins of 2%, and then they go up to three and a half in 23, 14, about 15% in 24 now.

And now we're, you know, this year we're 17.5. So you have seen an increase in that net margin. So that's that's a good sign. As an investor, the net margins are increasing over time. And we look out for 26. You're talking projected nearly 27 and almost 28. And 27 for the, for the net margins. So you can absolutely think, okay, well, this company was in one place.

They've been growing the business. They've done, you know, big acquisitions. They're certainly trying to get their products and services out there more and more. And, and now you're talking about healthy margins of, you know, 17.5, but 26 obviously a lot better. 20 almost eight, much better. With gross margins of 80%. So an excellent business and an improving business.

Now, one of the things that I think we want to look at here is, is certainly the revenue growth. So let's go back to that. So it's a big company already. And you had you know, we increased the you saw the increase in the net margins. Over time, over that same period, though, you've looked at revenue growth has actually come down pretty significantly.

You're at 25, almost 25% in 2022. Then you drop in the 18 and 23, 11 and 24, and 9 for 25 and so and then projected basically eight and nine for the next two years moving forward. So these are not stellar growth numbers. But, you know, because the company has become a big company already, it's it's already grown a lot.

And I think the expectation is it's going to be more and more difficult for it to find new markets, more customers, to cross-sell to existing customers. How much are they going to keep buying? And so I think it's important for us to think about that as a business. This is not an enormous position in our portfolio. Just, for, reference here, but it is an important position and something that we want our analysts at the Investment Institute, our students, to think about.

Okay, where should we be moving forward? It's a very solid company. You have these high, gross margins, and so they're excellent. Again, you would talk these would be top tier gross margins when you're talking about 77 and projected to go to 80%, gross margins. But when you look at the net, we're, you know, 17.5 projected to go to 26 and 28.

That's great. But you wouldn't say, you know, that's not a Visa, you know, 70 plus, net and 50 plus on the growth or on, I mean, 70 plus on the gross and 50 plus on the net. It's not that type of business. But let's also then look at, well, what's the free cash flow for this business.

It's $12 billion. That's excellent. Right. And so those things are good. But not let's say great for the business. So I would say very good. And we think about okay well what's the tailwind for this business? Certainly everybody's trying to do more digitally. People are going to want to make sure that they manage the relationship with their customers and all the things that are related to that and their teams.

Very well. They're trying to bring in more and more AI applications to their ecosystem for, for Salesforce, you know, and certainly, have done big acquisitions in the past. So I would rate this somewhere in the seven, right now, it could be six and a half to seven. I think it's grown a lot.

The concern that then I would have looking at this is, okay, where do they grow from here? How do they continue to cross-sell to their clients? And it's something that I want our analysts to keep their eye on. Where do we go from here? Maybe it's a seven now. It's a good business. Again, these super high gross margins are great, and they've been improving the net margin.

So maybe we give it a seven here. But a concern. They have grown steadily. That growth has slowed down. And we'll talk about that has actually showed shown up in their earnings multiple their PE when we talk about valuation which we will get to. But overall excellent business. I think it's an excellent business to be in the probability that, you know, people are going to need a CRM system, is very high if you're running a business, right, of any type of scale and, and the way that they manage it, you can almost get this software really at any scale of business.

So you can scale up with it. That's part of the benefit of having a system like this that's delivered all online, that as your business scales, you can scale, with this, you know, you can have Salesforce scale with you. And that is part of why it's so flexible. And why people may consider using it. And I'm not advocating specifically for their system, but that's one reason, you know, why this is, is a good business, because people can use it at one scale and increase it over time.

And for them, having these really high margins is fantastic. And so, that's great news. For us as shareholders. All right. Now let's move on. That's the business now management. Then we'll do, price valuation and then balance sheet. So let's let's look at the management. We're not going to spend a ton of time on this.

Many people you might know, who the CEO is, Marc Benioff, who's chair CEO and co-founder. So for a lot of businesses we talk about, we'd like having a founder or a co-founder as the CEO. Certainly has a passion. Is enormously wealthy already, by sort of any almost standard in the US and around the world, and so clearly has a vision for the company, wants to continue growing the company.

But you look at, okay, well, what is what's the ownership stake, for Marc Benioff, the CEO and co-founder, you're talking about 2.3%. So this is not an enormous stake in the business. It's a good stake. But again, this is not Larry Ellison, who's 40%, Warren Buffett, you know, 30, 40%. You're talking about a much smaller portion there.

When we talked about Fortinet, the two co-founders own 15%, between the two of them. So not that type of stake in the business, but a meaningful stake, right? Certainly for this very large company, that's a considerable amount of wealth. And so it's a meaningful stake. It's important. Certainly has been leading the company well, has seen it grow over time.

Is one of the best known CEOs from the Bay Area, in the tech world. Marc Benioff, well known, and again, a lot of kudos, came from Oracle. And really has done a fantastic job here with this company. And if you've been an early shareholder, you've made a lot of money with Salesforce.

But if you're new to this and if you're looking at it today, that's what we care about. You know, we don't live off the past gains, especially if you're a new investor. But even if you've had past gains as an investor, as an analyst, we got to think about what's today and what's tomorrow, what decisions do we need to make?

How do we evaluate that? So I would say very excellent score here. How do we evaluate the management? Good track record, has done well over time. Has been a good shepherd for this company. Has seen really through these big growth phases. So we would give them a high score. We're talking seven or eight here. I think the concern that I would have here is where do we grow?

It's the same when we talk about the business. How does management really execute around that? Where is the growth potential? Where are they seeing that coming from? How do they get from where they are today to, you know, double the revenue? As an example, AI, they talk about that and there's a little bit of a tussle between Marc Benioff and Microsoft.

If you watch the news a little bit here around this AI piece. And so that could be amusing, to watch and take note of. But really, as an investor, we're thinking about, okay, how's Marc Benioff and the team there thinking about how they're getting AI to be more and more part of the fabric at Salesforce for their clients?

So it makes it easier and more efficient and makes their clients more productive for their businesses, because then they're likely to want to pay more for that, or they want more services. And so that's good for them. And if you have high gross margins, obviously when you make those sales, a lot of that's going to drop, you know, from the gross margin and then as you increase these net margins as we talked about, that's going to then drop to the bottom line.

And they've been increasing those. But, you know, how do you increase revenue? Obviously the cross-selling, the selling different products, the AI applications, when your companies that you're selling to become more efficient with these products, they're likely to buy more of it. So that is all good news. But execution is everything here. AI is obviously in the early stages of being deployed in what are going to be the real use cases and how do people become really more productive in using this customer relationship management software and running their businesses?

I think time will tell. I think that is all. As an analyst, here, I think it's important to pay attention to. So and I'm trying to work on this too. What are these applications for AI? And then when you start looking at where specifically are they going to be best deployed, you can certainly think that this would be an area where if you can run your business better, and your interactions with your customer are smoother, are more efficient, your customers are going to appreciate it.

You're going to appreciate that that is going to be a much more useful tool for you. Maybe it also helps reduce your headcount if you're trying to cut your own costs, if you're trying to increase your margins, what you're probably trying to do as a business, this can help you. So it's worth spending some time, even if you're not a shareholder in CRM ticker,

Salesforce individually, I think it's worth some time to figure out on the AI side, what are these applications? What are they going to be these killer applications that it's really going to drive productivity forward? So when you look back, for example, in the 90s, if you saw productivity, we had a pretty good growth rate. You had this sort of the birth of the internet in the 90s and early 2000s.

What's going to be those productivity gains that people talk about now that maybe are analogous, that are similar to those gains that we got from the internet? And you could see companies like Salesforce potentially be able to take advantage of that, of those productivity gains. And that would increase their market share, that would increase their revenue.

That may just increase the pie of the products and services that they can sell. And so I think that's something to pay attention to. So again, management needs to navigate them too, that Marc Benioff has done an excellent job. Co-Founder of the company, came from Oracle, great track record. But obviously needs to continue to deliver today and tomorrow I'd say a seven around the management team.

Remember 1 to 10, 10 being the best. All right. So now let's look at the price valuation. So now we're getting into the next component of the investment framework. Remember business, management, price valuation. That's what we're on now. And we'll cover balance sheet and bring it all back together. So where are they now? And remember we use PE for the most part price earnings ratio.

And we use the forward because we care about what's going to happen in the future, today and tomorrow. And we have to make our decisions today based on that information and what we do. So we don't look back, we look forward, to the forward PE 25 times. That is not a high PE for this company. It's historically been higher than that.

And, you know, I think it's an interesting time to be looking at Salesforce and the growth, you know, as I mentioned, has slowed down. So you have to think about that. But they have increased their net margins. But 25 times forward, the market multiples, the S&P 500 price earnings multiple right now again early March is about 21 times.

And so you're not paying an enormous premium for Salesforce right now. Now, I wouldn't call this a deal or huge discount because of the some of the things we've talked about. They've already grown a lot, the sales have slowed down. Now they are increasing that profitability. They already have really high gross margins, but they're bringing those net margins up.

And so that's important. They've done some big acquisitions. So you know, how those get digested in over time has generally worked. But obviously, to get the needle to move, in a big way, organic sales will have to really rapidly grow or, and or they're going to have to do other big acquisitions. And can they digest those?

Can they keep their margins high? Can they keep those customers happy and can they retain those customers? And so I think it's a really thing, something important here also to watch is you're not paying an enormous premium here, to the market multiple. But I think the market is saying something here that they're concerned about. Where does the company grow from here?

But the good news is, you know, they're picking up, they certainly have better gross margins than an average company, right? When you think about them on the gross margin side at 77% going to 80. And you look at the net margins at 17.5 going to, you know, 26 and 28, almost. That's better than average for the most part.

So, certainly on the growth side and even on the net now. So when you're thinking about paying a market multiple of 21 times to buy the S&P 500, and you're talking 25 times, for CRM, it's certainly not uncomfortable. Wouldn't call this a really undervalued, in the classic sense, Warren Buffett, Ben Graham style here.

But you could say that this is fairly priced, at the moment or certainly in that range, a fairly priced to the side of, okay, maybe, you're getting this, I would call on the cheap, but certainly not expensive, relative to the type of company it is, to the type of gross margins it has, to the type of net margin that is projecting to have moving forward.

So that said, it's an okay, so let's, number there. So let's give this, 6 or 7 here, maybe let's say a seven, for the price earnings, using that for the valuation piece. 25 times forward. Not bad. That gets a seven. All right. Now let's move on to the balance sheet. And again, we'll wrap the whole thing up.

So how have they done on their balance sheet? So when we talk about Salesforce again market cap to 70 billion here cash and cash equivalents. At the end of January 2025 14 billion and total debt of 11 billion. And so the static view here net cash of 3 billion. That makes us feel really good. And generating 12 billion in free cash flow.

So not something that we're terrifically concerned about. Certainly not something that, you know, would keep us up at night. We're definitely sleeping fairly well here with this multiple. And so again, now let's look at the interest coverage ratio. Not really a concern there. Again, net cash. Not really. You know, a good thing, and really not a concern again, we we sleep well at night with 3 billion in net cash.

A little bit more than that. Now we've done this with other companies, but let's also do it here. Let's look at that over time. So since 2022, the cash and cash equivalents have gone from, 10.5 billion up to 14, and the debt has gone from 14 and change down to 11. So the net cash position, it was a net debt position in 22 as an example.

And they have flipped that situation. So as a more conservative investor, like we think from the Investment Institute on the balance sheet side, not necessarily conservative in finding companies that we like that are growing, but on the balance sheet side, on the capital structure, on the conservative side, they have flipped that equation. And so those numbers are almost opposite now.

So back in 2022, 10.5 in cash and 14.3 billion in net debt, almost the reverse now 14 billion and cash and 11.3 billion in debt. So really they flip that net cash position of 3 billion. We like that. That looks good. And so, very favorable situation. And then the other part so I think very responsible.

So you can give kudos to management. Again balance sheet connected management runs that. And now if you look at okay well what's been the free cash flow over that period is well gone from 5.2 to now 12.4. So you're really given the balance sheet and 9 or 10 here. So that's good. All right. Now let's pull them all together.

So we talked again about a very solid business. High, you know, gross margins, in the 70, touching on 80 moving forward, but 17.5% net margins again, all delivered basically online customer relationship management software, really important business-to-business applications and growing over time. You know, what we're concerned about here on the business is how can they grow those revenues?

37.8 billion, at the end of January 25th, you know, in projected 8%, 9%, these are not great. So that's a concern there. Again, kind of a seven Marc Benioff doing a fantastic job on the management. Probably a seven there. And you look at price valuation 25 times PE move for the forward PE here in early March. Not bad.

Pretty good seven. And then you look at the balance sheet. That's probably a 9. So you're probably looking at a 7.25, 7.5 depending on how we settle on all those scores. So we pull all those together quite good. You know when you talk about you're getting over a seven on a score. Quite good. Something for us to watch.

I think it's important for us to watch the AI piece of this. And as an analyst, as a business person, really understand that. Continue to watch Marc Benioff. He's been in this seat a long time making sure that we have clear view on on his outlook for the company. Then we look at the valuation. Not bad. 25 times. 21 is the market multiple for the S&P 500 right now.

And very solid net cash of 3 billion, generating a ton of free cash flow 12, almost 12.5 billion of free cash flow. So that puts us into about a 7.25, maybe 7.5. So very good, trending better. We got to keep our eye on this. That will continue to ask our students to do that.

But that is a wrap for ticker CRM Salesforce. Thank you for watching this episode of “Market News with Rodney Lake.” We'll see you back on the next show. Thank you.

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