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Salesforce Stock Remains a Strong Pick for an Investor’s Cloud Portfolio

Will Ashworth

In November 2018, I called Salesforce (NYSE:CRM) one of the best cloud stocks to own. Since then, CRM stock is up 12% or 16% on an annualized basis. 

Salesforce Stock Remains a Strong Pick for an Investor's Cloud Portfolio

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Considering Salesforce’s Q2 2020 results were healthy, a 16% gain hardly seems like enough.

Sure, it might not have the cheapest valuation among tech stocks, but given its prospects for growth, CRM stock is still a reliable option for those betting on the cloud. 

The Cloud Delivered in Q2

Salesforce’s overall revenue in the second quarter was $4.0 billion, 23% higher than a year earlier excluding currency, and $50 million higher than the consensus estimate. On the bottom line, it blew through estimates, generating earnings per share of 66 cents, 40% higher than the analyst consensus estimate of 47 cents. 

About the only negative would be the 7% decrease in earnings per share.

As for the cloud, it continues to deliver for Salesforce shareholders. Sales Cloud, Service Cloud, and Marketing and Commerce Cloud, saw revenues increase by 13%, 22%, and 36%, respectively, during the second quarter while the Salesforce Platform increased revenue by 28% during the quarter. 

As for its regional performance, the Americas had the best results in Q2, growing sales by 20% to $2.82 billion. Meanwhile, Europe and the Asia Pacific, which together account for just 30% of Salesforce’s overall revenue, increased sales by 25% and 26%, respectively. 

“An enormous wave of digital transformation is sweeping across every industry, and major brands, like FedEx, AXA and Unicredit, turned to Salesforce in the quarter to propel their growth,” said Keith Block, co-CEO, Salesforce. “The trust our customers have in us to drive their digital transformations is reflected in our strong quarterly results across our clouds and regions.”

Business was so good in the second quarter that the company raised its guidance for fiscal 2020 from $16.25 billion at the high end of its previous estimate to between $16.75 billion and $16.90 billion. 

Its revenue in fiscal 2019 was $13.3 billion. That suggests sales will grow by 27% year over year, which includes $600 million from Tableau Software, the all-stock $15.7 billion acquisition it completed on Aug. 1.   

Anyway you slice it, Salesforce is on a roll. 

CRM Stock’s Worth Considering at Current Prices

InvestorPlace’s Tom Taulli pointed out last week that CRM stock has had an anemic return in 2019, up 10.7% year to date through Aug. 23. By comparison, the two biggest cloud companies by market share — Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) — are up 20% and 37%, respectively. 

Taulli finished his latest piece about Salesforce by suggesting that it would make an excellent core holding for anyone looking for exposure in AI and the cloud. Just don’t expect the kind of growth Salesforce delivered a decade ago. Instead, be happy with slow and steady winning the race. 

Speaking of core holdings, Salesforce stock is the biggest holding, at 9.63% weighting, in the 94-stock iShares Expanded Tech-Software Sector ETF (BATS:IGV), which is up 20.7% in 2019.

Nothing’s changed, in my opinion, from November to today. Salesforce continues to beat earnings estimates. I doubt that’s going to change anytime soon. 

As Taulli said, you ought not to expect the kind of long-term returns it’s delivered in the past. Over the last 15 years, it’s generated an annualized total return of 29%. If you can accept half of that, CRM stock remains a strong option to play the cloud. 

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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