Is Salesforce’s (CRM) growth Sustainable?

Salesforce (CRM) is experiencing dramatic growth. Predictably, skeptics will wonder if Salesforce’s growth is sustainable.

For example, Salesforce’s share price grew from $189.12 on 8 June 2022 to $209.53 on 8 June 2023. Financial numbers justify Mr. Market’s faith in Salesforce. For example, Salesforce’s quarterly revenues grew from $7.411 billion on 30 April 2022 to $8.247 billion on 30 April 2023.

Salesforce’s revenues grew by 11.28% in the quarter ending on 30 April 2023. However, revenue growth fell from 24.28% in the quarter ending on 30 April 2022.

Growth translates into more money at Salesforce (CRM)

That growth is translating into more money at Salesforce Inc. (NYSE: CRM). For example, Salesforce’s quarterly operating income grew from $20 million on 30 April 2022 to $412 million on 30 April 2023.

Similarly, Salesforce’s quarterly gross profits grew from $5.366 billion on 30 April 2022 to $6.122 billion on 30 April 2023. Plus, the quarterly operating cash flow grew from $3.676 billion on 30 April 2022 to $4.491 billion on 30 April 2023.

Impressively, Salesforce’s quarterly ending cash flow grew from $6.859 billion on 30 April 2022 to $9.155 billion on 30 April 2023. Impressively, Salesforce’s quarterly investing cash flow grew from -$2.457 billion on 30 April 2022 to $347 million on 30 April 2023. Thus, Salesforce is generating more cash, revenue, and income.

Conversely, Salesforce’s cash and short-term investments grew from $13.503 billion on 30 April 3022 to $13.977 billion on 30 April 2023. Thus, Salesforce is keeping more cash.

What Value does Salesforce (CRM) offer?

Interestingly, Salesforce is gaining a little extra value. Salesforce’s total assets grew from $93.022 billion on 30 April 2022 to $93.541 billion on 30 April 2023.

However, I don’t think that value justifies the $209.53 Mr. Market paid for CRM on 8 June 2023. I consider Salesforce overpriced.

Salesforce is the world’s largest Customer Resource Management (CRM) provider, with 150,000 customers, Ascendix estimates. Notable Salesforce customers include Spotify, Amazon Web Services, Toyota, US Bank, and American Express.  

I think geography could limit Salesforces’ growth. For example, 62.1% of Salesforce customers are in the US, Ascendix estimates. The second largest Salesforce market is the United Kingdom, where 13.6% of customers are located. The third largest market is France, which has 4.9% of customers.

Therefore, Salesforces principal markets are the United States and Europe, which are not growing.

Salesforce is not Positioned for Growth

Ascendix estimates Salesforce has no large customers in Asia, or in fast-growing markets such as China and India. In particular, Salesforce has few customers in the world’s second largest economy, the People’s Republic of China.

Thus, Salesforce is not in a position to grow because it is not in the growing markets. US Gross Domestic Product (GDP) grew by 5.9% in 2021 as COVID-19 ended, the World Bank estimates. However, Chinese GDP grew by 8.1% in 2021 and Indian GDP grew by 8.7% in 2021.

I think Salesforce is growing with the US market. If US growth ends or reverses, it will hurt Salesforce. Notably, Salesforce has a heavy exposure to Europe where the economy is reeling from labor unrest and the Ukraine war.

Moreover, Salesforce is heavily exposed to US risks such as the debt ceiling default. Notably, the debt ceiling crisis could return in January 2025, because Congress has suspended the ceiling until then. Hence, the legal structure that led to the debt ceiling crisis was still in place.

Thus, we could see a massive drop in US stocks and GDP which will harm Salesforce in 2025.

Will Artificial Intelligence Hurt Salesforce?

A potential threat to Salesforce products such as the 360 platform is generative artificial intelligence (AI). For example, I think AI chatbots such as ChatGPT and InstructGPT could threaten Salesforce.

I think InstructuctGPT is a threat to Salesforce because it aligns language models to follow instructions. Hence, OpenAI, ChatGPT’s creator, could build products that can compete with Salesfore. Notably, Microsoft (MSFT) is now offering an Azure OpenAI Service that offers large scale AI models.

Salesforce is trying to compete with OpenAI with Einstein GPT. They call Einstein the first generative AI for customer resource management (CRM).

Salesforce claims Einstein GPT can use real-time data to write emails and hold conversations with customers. Einstein GPT offers low-code tools that make building CRM solutions easier. You can integrate Einstein with Customer 360.

Some Salesforce customers including Ford (F), Loreal, NASA, ADT, Duluth Trading, T-mobile, Humana, and the Royal Bank of Canada (RBC), NBCUniversal, Kellogs, Bentley, PayPal, Mercedes Benz, IBM, Southwest Airlines, Unilever, are using Einstein GPT. Thus, Salesforce is trying to cash in on AI.

Salesforce’s Growth is not sustainable

Hence, Salesforce is using new technologies but there is not evidence it is expanding into markets. Thus, I think investors need to avoid CRM because I don’t think Salesforce’s growth is sustainable. Instead, I think the growth will stop at some point, leading to collapse.

I think investors need to avoid Salesforce (CRM) because Mr. Market overprices it. Another drawback is that Salesforce pays no dividend. I think there are better CRM stocks out there including Microsoft (MSFT) which pays a dividend.