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Last week, the world’s most powerful customer relationship management (CRM) platform reported second-quarter earnings that beat analysts’ expectations.
It also raised its guidance for third-quarter operating margins and revenues, citing the positive impact of its latest string of acquisitions. I am bullish on the stock. (See CRM stock charts on TipRanks)
Here’s a quote from Marc Benioff, Salesforce chair and CEO, following the release of Q2 financial results:
“Salesforce has never seen better execution or greater momentum. Our Customer 360 platform is now fueled by a herd of unicorns perfectly designed for this all-digital world. Sales, Service, Marketing & Commerce, Platform, Tableau, MuleSoft and now Slack are all billion-dollar-plus products delivering customer success like no other company.”
Acquisitions Coming Through
The catalyst behind Salesforce’s robust earnings and revenue growth was a string of acquisitions that have allowed it to expand the scale and scope of its operations, including the purchase of Slack Technologies (NYSE:WORK), Inc. last year.
Acquisitions further allowed the company to pursue bundling, and compete effectively against software giants like Microsoft (NASDAQ:MSFT).
TipRanks assigns a Smart Score of “Perfect 10” to Salesforce, citing increased hedge fund activity, bullish news sentiment, and strong technicals.
Analysts are bullish on CRM. They rate its shares a Strong Buy with a high price target of $350 and a low forecast of $242. The average CRM price target of $303.62 represents a 14.9% change from the last price of $264.15.
In the Footsteps of Cisco?
Salesforce’s fast-track growth strategy is neither new, nor unique. Several technology companies have gone a similar route the past, including Cisco Systems (NASDAQ:CSCO).
The network gear pioneer acquired dozens of smaller technology companies in the middle- and late-1990s, including Cresendo Communications (1993), Newport Systems Solutions (1994), Network Translation (1995), Netsys Technologies (1996), Net Speed (1998), and Growth Networks (1999).
That’s how Cisco turned from a small start-up, to an industry giant in a short time.
The trouble is that growing externally through acquisitions, rather than internally, has its limitations. First, it can become quite costly, as companies up for sale can go to the highest bidder, diminishing the returns on the invested capital. For instance, in December of 2020, Salesforce paid $27.7 billion to acquire Slack. That’s a 55% premium over the price Slack traded at before the acquisition talks began.
Second, these acquisitions can be dilutive to shareholders’ equity, as they are usually paid with the issuing of new shares. That’s how Cisco Systems ended up with 4 billion shares and Salesforce with close to a billion shares.
Summary and Conclusions
Salesforce’s fast-track growth strategy that relies on acquiring young companies to include in its portfolio has been paying off, as evidenced by a string of solid earnings and revenue reports.
However, this strategy carries its risks and limitations, as new acquisitions can become more expensive and dilutive to shareholder equity.
Disclosure: At the time of publication, Panos Mourdoukoutas held a position in Salesforce and Cisco.
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