Software-as-a-service (SaaS) solutions are revolutionizing how people work, and thanks to growing demand tied to an improving economy, sales growth has sparked a 33.4% increase in salesforce.com (NYSE: CRM) share price in 2018, according to S&P Global Market Intelligence.
Salesforce's customer relationship management (CRM) software has become a staple used by companies to manage their sales cycle.
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Rather than sell enterprise software that's installed locally, SaaS companies like Salesforce provide licenses to customers that allow them access to continuously updated software. This subscription model provides predictable revenue and, once companies reach scale, handsome margins.
The company's large footprint (it works with 83% of the Fortune 500 and 97% of the Fortune 100) is beginning to translate into considerable operating leverage that's fueling earnings growth, particularly now thanks to a strong economy boosting sales activity.
Sales in fiscal 2018 were $10.5 billion, up 25% year over year, and in January, management unveiled long-term guidance calling for $20 billion in revenue by 2022, $40 billion by 2028, and $60 billion by 2034. If revenue can grow that quickly, it should be a boon to profitability. Last quarter alone, non-GAAP operating margin increased 3.2% to 17%, and as a result, non-GAAP earnings per share increased 33.6% to $1.35.
Expansion into ex-U.S. markets and acquisitions are two ways Salesforce hopes to deliver on its long-term targets.
So far this year, it's announced plans to invest $2 billion in Canada, $2.2 billion in France, and $2.5 billion in the U.K. over the next five years to build up its business in those countries. On the acquisition front, it acquired Mulesoft in March to make it easier for customers to share and analyze data between different software solutions.
This fiscal year, it expects sales of at least $13.07 billion and non-GAAP EPS of at least $2.29. The company's beaten estimates in each of the past four quarters, so I don't think it's a stretch to think it can deliver on those targets.
In the future, the company still needs to outmaneuver well-heeled competitors, including Oracle and SAP. However, Salesforce's 20% CRM market share is more than twice that of its next biggest competitor, and that shows it already knows how to beat them.
If Salesforce can continue executing (and I think it can), then it could continue to deliver market-beating, long-term returns, especially since Gartner expects its addressable market to increase to $123 billion in 2021 from $72 billion today.
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Todd Campbell owns shares of Salesforce.com. His clients may have positions in the companies mentioned.The Motley Fool owns shares of and recommends Salesforce.com. The Motley Fool has a disclosure policy.