Salesforce.com (CRM) aims to more than double its annual revenue to $20 billion, but its shareholders might settle for a different, near-term goal: better stock performance after a disappointing 2016, marked by its first earnings miss in several years.
San Francisco-based Salesforce.com seems on track to hit $10 billion in revenue in its fiscal year ended Jan. 31, 2018, bolstered by numerous acquisitions. It's expected to end up with revenue of roughly $8 billion for its fiscal 2017 ending Jan. 31, up from just more than $1 billion as recently as 2009.
Salesforce.com stock fell 12.6% in 2016, after hitting an all-time high of 84.48 in May, but it's up 15% in 2017, rising a fraction to near 78.73 in the stock market today.
What's preventing Salesforce.com's from hitting $20 billion or of being a 2017 comeback stock?
In both cases, Microsoft (MSFT) might be the better answer than Salesforce's two longtime top business-software rivals Oracle (ORCL) and SAP (SAP). Increased competition from Microsoft as it integrates business social media platform LinkedIn, acquired last month for $26.2 billion, continues to loom over Salesforce.com.
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It's not all about fighting Microsoft, though, says Andrew Bartel, a principal analyst at Forrester Research.
"The real issue is what are the additional product categories that Salesforce.com can add that positions them for growth," Bartel said. "Microsoft is a competitor, but there's more involved in Salesforce.com hitting that $20 billion target."
Salesforce.com's bread and butter remains its cloud software-as-a-service, sold under a subscription model and designed to helps businesses organize and handle sales operations and customer relationships. Software users track deals and manage client interactions.
Microsoft Pushes Deeper Into Salesforce.com Territory With LinkedIn
Microsoft, though, has been pushing into the cloud customer relationship management, or CRM, market itself, undercutting Salesforce.com's pricing.
Analysts expect Microsoft to bundle more Office 365 and office productivity SaaS software with LinkedIn's enormous database and "Sales Navigator," its sales lead and client interaction tools. Microsoft now can provide more products to help customers generate sales leads and close deals, analysts say.
Keith Weiss, a Morgan Stanley analyst, says the Microsoft threat might not be overstated. In a recent research report, Weiss said Salesforce.com continues to add share at the high end of the CRM market. Microsoft, he says, has gained in great part with small and medium-sized companies, mainly at the expense of Oracle and SAP.
Weiss says Salesforce.com's strength is its broad offerings that span sales automation, marketing and customer services.
Walter Pritchard, a Citigroup analyst, says Salesforce.com's quest to the $20 billion revenue mark depends largely on share gains in marketing and customer services software, two areas where it can leverage its CRM customer base. Salesforce.com's $2.5 billion purchase of Exact Target in 2013 jump-started its move into marketing software.
In marketing software, Salesforce.com's main rival is Adobe Systems (ADBE), but Pritchard expects Microsoft to make acquisitions as it aims to recreate the best parts of Salesforce.com.
"We see the only way for Microsoft to make enough headway to be competitive with Salesforce.com — and this at the low end of the market — would be to acquire Zendesk (ZEN) and HubSpot (HUBS) — the only assets left with scale in customer service and marketing," Pritchard wrote. "We expect the appetite to do this for the next 12 to 18 months is low, as Microsoft is likely focused on driving value from the purchase of LinkedIn before diving back into meaningful M&A."
Salesforce Hooks Up With Amazon Web Services
Microsoft, though, already has something major that Salesforce rivals Oracle and SAP don't: a fast-growing cloud computing service branded Azure. With Azure, Microsoft is a leader in platform-as-a-service (PaaS), selling applications and software, including business management and database services, that run on cloud infrastructure.
Salesforce.com last year selected Amazon.com's (AMZN) Amazon Web Services as its public cloud infrastructure provider. But the partnership could fray like the one-time close Microsoft-Salesforce.com relationship, analysts say. AWS leads in IaaS, infrastructure-as-a-service, with Azure No. 2.
The battle between Salesforce and Microsoft is shaping up to be long term. both Microsoft and Salesforce.com are investing heavily in artificial intelligence. Salesforce.com debuted its "Einstein" AI initiative late last year.
Salesforce.com aims to embed data analytics and "machine learning" into its CRM and marketing software, making it easier for customers to automate tasks. Microsoft launched its AI-based Dynamics 365 sales SaaS software late last year.
Both Companies Quickly Adding To Arsenals
While Salesforce.com has made at least nine AI-related acquisitions, Microsoft has gobbled up startups as well. And Microsoft's R&D budget, at $12 billion annually, is roughly 15 times that of Salesforce.com, estimates Pritchard.
Salesforce.com doled out more than $4.6 billion in 2016 making acquisitions, including the purchase of e-commerce firm Demandware, which helps companies run their online shopping sites. At $2.8 billion, Demandware was Salesforce's largest acquisition. Salesforce.com has a cash balance of about $1.75 billion.
Although Salesforce.com backed away from a Twitter (TWTR) purchase last year, concern lingers that any large deal would require a big chunk of stock that would dilute the equity of existing shareholders. The bear argument also says acquisitions might be artificially lifting bookings.
"A clear management message that it will pause on large deals for the next 12 months … could go a long way in reassuring investors," said UBS analyst Brent Thill in a research report analyzing how Salesforce.com "could be the turnaround story of 2017."
Morgan Stanley, in a report, said it expects "more of the same" from Salesforce.com, namely smaller "tuck-in" deals. In 2016, smaller deals included marketing data specialist Krux; business analytics platform BeyondCore; and Quip, a developer of a cloud-based word processing app that competes with Microsoft's Office.
One startup that could interest Salesforce.com is Slack, says Forrester's Bartel.
Adobe Systems ServiceNow In The Picture?
A list of the company's potential takeover targets, revealed in a resentation to Salesforce's board of directors, leaked in mid-2016. It included ServiceNow (NOW) and Pegasystems (PEGA) as well as much bigger rival Adobe Systems. ServiceNow's core business is software for information technology service management, or ITSM. ServiceNow has expanded into human resources, customer service and security.
Salesforce.com last year shot down interest in Adobe, though there could be synergies. Adobe's Marketing Cloud is bigger than Saleforce.com's similar business and "is expected to continue strong annual growth of 20% in revenue and 30% in bookings through 2018," said UBS' Thill.
Aside from UBS, analysts from Canaccord Genuity, BTIG Research and Piper Jaffray also have called Salesforce.com, the leader in software-as-a-service, a top stock pick in 2017.
Piper Jaffray and Drexel Hamilton, though, say Salesforce.com itself could be a takeover target. But Forrester's Bartel says the "moment in time has passed" for a Microsoft purchase of Salesforce.com. The pair reportedly broke off talks in May 2015.
Salesforce.com has taken steps to stop relying on Oracle's database technology to run its business software. Oracle co-founder Larry Ellison and Salesforce.com CEO Marc Benioff, a 13-year Oracle executive before he left to start Salesforce, have exchanged numerous barbs over the years.
In a Dec. 19 research report, though, Drexel Hamilton analyst Brian White says, "Who is to say that Microsoft, Oracle or another large company would not be interested in acquiring Salesforce in the coming years."
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