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Salesforce’s Acquisition Strategy Is Paying Off (Literally)

Brian Carey, The Motley Fool

Last month, Salesforce (NYSE: CRM) reported better-than-expected earnings and raised guidance for its current fiscal year. Part of the reason for the company's success is its buying strategy, purchasing software companies like Tableau and MuleSoft.

In August, Salesforce snapped up Tableau for a cool $15.3 billion. That's going to add between $550 million and $600 million in revenue for the current fiscal year, according to Chief Financial Officer Mark Hawkins.

A group of laptops encircling a cloud.

Image Source: Getty Images.

But the Tableau acquisition is hardly an isolated incident. For years now, Salesforce has been on a buying spree that's fueling its growth. However, its acquisition strategy is challenging the company's original mission.

Only so much room in the cloud

Once upon a time, Salesforce prided itself as a business offering software that runs in the cloud. Cloud-based solutions are attractive to organizations of all sizes because they don't require on-site software installations. A standard web browser is typically all that's needed to get up and running.

Lately, though, Salesforce has been purchasing companies that threaten its cloud-focused message.

Take the Tableau acquisition, for example. Tableau gathers data from various sources and presents it in charts and graphs so strategists can get a quick read on important metrics. However, the software runs predominantly in on-site data centers rather than the cloud.

Additionally, Salesforce acquired MuleSoft last year for $6.5 billion. This company connects data from different types of sources, including in-house servers. It's a fabulous service for businesses that need to connect applications, but it's not strictly cloud-based, which, like Tableau, also helps to expand Salesforce's reach beyond beyond the cloud.

So why the change?

There's a very good reason why Salesforce is acquiring companies that don't line up with its original charter. It can be summed up in one word: reality. Many businesses have legacy data that they still want to use today. That data includes information and profiles on their customers that's invaluable for future marketing campaigns. 

And some businesses were late adopters of cloud technology. They may only have customer data stored in their on-site servers.Those companies want to keep that information but they need assistance in gathering, aggregating, and processing in-house data. Solutions like MuleSoft empowers businesses to extract data from various systems, while Tableau enables them to use existing data to make informed decisions about marketing.

In other words, both acquisitions enable Salesforce to be a holistic solution for marketing services. In addition to offering customer relationship management software, Salesforce now provides strategists with key insights derived from different systems.

In other words, the company is on its way to becoming a "one-stop shop" for all things related to sales and marketing. Salesforce is living up to its name.

Other acquisitions

Salesforce acquired several companies before the Tableau and MuleSoft purchases. Among them:

  • Datorama - A single platform that includes all marketing analytics. Salesforce bought it for $766 million in 2018.
  • Demandware - A cloud-based e-commerce solution. Salesforce bought it for $2.8 billion in 2016.
  • ExactTarget - An email marketing solution. Salesforce bought it for $2.5 billion in 2013.
  • Krux - An ad tech company. Salesforce bought it for $742 million in 2016.
  • Radian6 - A social media monitoring platform. Salesforce bought it for $337 million in 2011.

Salesforce folded these companies into its Marketing Cloud and Commerce Cloud divisions, which supports Salesforce's (mainly digital) marketing tools. The Commerce division supports Salesforce's e-commerce solutions.

Sales from those two divisions are reported together on the company's financial statements. Last year, they took in $1.9 billion in revenue, or 15% of total sales. That's an increase of 12% from two years earlier. This past quarter, the Marketing and Commerce cloud raked in $616 million. That's an increase of 36% from the $452 million reported for the same quarter in 2018.

Compare that to revenue from Sales Cloud, the company's "flagship" operation. Gross sales for that division came in at $1.13 billion this year. But that's only a 12.5% increase from the same quarter a year ago.

In other words, revenue generated from acquisitions is growing faster than revenue from Sales Cloud. Similarly, in the last quarter, Marketing and Commerce sales grew faster than the sales from the Service Cloud (22%) and the Salesforce platform (28%).

Paying off in the long run

Salesforce's acquisition strategy, thus far, is returning value to shareholders. It's also fueling growth.The company is currently trading at about 50 times forward earnings. For some investors, that's a little too overvalued. However, if you've got a long-term outlook and you're on the hunt for a growth stock, it might be just what you're looking for. 

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Brian Carey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Salesforce.com. The Motley Fool has the following options: long January 2021 $100 calls on Salesforce.com. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com