A look at Salesforce – and why it's compelling here
In yesterday's e-mail, I shared the bullish case for software stocks outlined by me and my team in the latest issue of Stansberry's Investment Advisory...
The sector has been clobbered in what's being called the "SaaSpocalypse," referring to Software as a Service ("SaaS") stocks.
But most investors lack the ability to distinguish between the winners and the losers. And we think this "has created a tremendous opportunity for investors who understand enterprise software and where the industry is headed."
So today, I'd like to analyze one software stock that looks compelling – Salesforce (CRM)...
It was once one of the all-time great growth stocks, rising roughly 100 times from 2004 through 2024.
But since then, the stock has fallen by more than 40%, as you can see in this chart:
The company has highly attractive economic characteristics, with 78% gross margins, 18% net margins, and minimal capital expenditures ("capex"). And I can't recall ever seeing such a beautiful cash-flow chart:
In sharp contrast to the rising free cash flow is the multiple that investors are placing on it...
Its multiple has steadily declined and is now close to an all-time low, as you can see in this chart my friend Marcelo Lima shared on X:
I wrote about Salesforce on September 22, when the stock was around $250 and, fortunately, stayed away.
But at yesterday's close of $195.31, it's a different story...
In a follow-up X post, Marcelo does an excellent job of outlining the bull case for the stock. Here are the first few paragraphs (see the full post for more):
Salesforce certainly agrees that its stock is cheap. That's why in February, it announced a $50 billion share-repurchase program, equal to 28% of its current $180 billion market cap.
Lots of companies announce big buybacks and don't follow through, but that's not the case here. Salesforce just issued $25 billion of debt and used it to buy back 14% of its outstanding shares this week, per the company's press release on Monday.
You might be thinking, "But this is all backward-looking. What if Salesforce's customers start using AI tools to track their customer relationships, and the company's business starts to decline?"
To evaluate this risk, my team, which has a combined 25 years of experience working at software companies, has developed a proprietary framework for evaluating software companies – including their resilience against AI.
As I wrote yesterday, quoting from our latest issue of Investment Advisory:
In researching today's issue, we started by evaluating all 258 publicly traded software companies against 12 criteria. These included things like whether software is a "system of record" that controls proprietary customer data, has embedded workflows and can "talk" to other software programs, has high switching costs, and is a platform rather than simply a user interface.
Companies most resistant to the AI threat will have many of these traits.
Large SaaS platforms that have proprietary customer data, years of usage patterns, and embedded workflows will survive. Companies that make nothing more than a slick user interface or a fancy dashboard are toast.
Simple applications can be swapped out. Other types of software are so embedded, they're like connective tissue – very hard to replicate and replace.
With the help of AI, we scored each company on all 12 criteria on a scale of 1 (highly vulnerable to AI substitution) to 10 (structurally resistant).
We weighted the 12 factors by importance. We then took the weighted average of the grades to rank which companies are most durable... and which are most at risk. The higher the score, the more resilient the company is. The lower the score, the more vulnerable.
In the issue, we shared a list of the 20 software companies with the highest score – meaning they're the least vulnerable to the threat of AI.
Only Investment Advisory subscribers can access this list. But I can tell you that Salesforce had the third-highest score out of 258 publicly traded software companies. So I'm not worried that Salesforce is going to go into decline.
In summary, this is a great business with a bright future. If anything, it will likely benefit from AI. It has one of the most aggressive share repurchase programs I've ever seen. Yet the stock trades at a mere 12 times trailing free cash flow. That's compelling.
But believe it or not, my team and I think there's one stock that's even more compelling, which we highlight in our latest issue. To become an Investment Advisory subscriber and access it immediately, click here.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.
P.P.S. I just got five more pictures from Sunday's NYC Half Marathon. Starting at the top left and going clockwise is my youngest daughter Katharine and me going over the Brooklyn Bridge (before she left me in her dust), on the FDR Drive, through Times Square, and in the final sprint:
