Salesforce (NYSE: CRM) made a grand entrance into the stock market back in 2004 at a modest split-adjusted price of $2.75 per share. Those who had the savvy to invest $10,000 in its initial offering would be swimming in the green today with about $930,000 in their pockets. This cloud software behemoth mesmerized investors with its meteoric rise and its aggressive expansion into various markets including sales, marketing, e-commerce, and analytics.
However, in the last three years, the stock has somewhat lost its shine, with a mere 6% increase while the Nasdaq has surged by 23%. The aura around this cloud leader dimmed as its revenue growth plateaued. Despite still boasting a market cap of approximately $250 billion, Salesforce might need to brace itself as three of its peers are poised to potentially surpass its valuation in the coming three years.
Image source: Getty Images.
Understanding Salesforce’s Deceleration in Growth
Before delving into the contenders eyeing Salesforce’s throne, it’s imperative to dissect the hurdles the cloud giant has stumbled upon. As the top dog in cloud-based customer relationship management (CRM) services, Salesforce capitalized on its dominance to diversify its portfolio with marketing, e-commerce, analytics, data visualization, and enterprise collaboration services, largely through hefty acquisitions.
From fiscal 2004 to fiscal 2024 (culminating in January), Salesforce experienced a staggering compound annual growth rate (CAGR) of 34% in revenue. However, the narrative took a swift turn as revenue growth tapered off to a scanty 11% in fiscal 2024. Projections foresee a modest CAGR of 9% up to fiscal 2027.
The reasons behind this deceleration are multifaceted – macroeconomic headwinds constrained cloud spending, formidable rivals such as Microsoft and Adobe (NASDAQ: ADBE) encroached on its territory, and activist investors nudged Salesforce to suspend major acquisitions and pivot towards cost reduction, share repurchases, and dividend disbursement.
The Rise of Potential Rivals
ServiceNow (NYSE: NOW), Adobe, and Alibaba Group (NYSE: BABA) may currently wear a valuation that pales in comparison to Salesforce’s, but industry analysts foresee a future where these three could outgrow Salesforce in the next three years, spurred by comparable or even brisker growth rates.
|
Company |
Revenue CAGR |
Est. Revenue CAGR (Next 3 Fiscal Years) |
Current Market Capitalization |
|---|---|---|---|
|
Salesforce |
18% |
9% |
$248 billion |
|
ServiceNow |
26% |
21% |
$157 billion |
|
Adobe |
15% |
11% |
$242 billion |
|
Alibaba |
9% |
8% |
$181 billion |
Data source: Marketscreener; CAGR = compound annual growth rate.
ServiceNow, with its cloud-based digital workflow solutions, is geared towards streamlining and automating unstructured tasks. Bolstering its portfolio with the Now Assist AI platform, the company enhances operational efficiency through generative artificial intelligence (AI). Thriving on an evergreen business model, economic downturns often prompt companies to tighten their belts and optimize their workflows, a narrative that serves ServiceNow well.
Adobe, renowned for its industry-leading digital media suite encompassing staples like Photoshop, Illustrator, and Premiere Pro, boasts a loyal customer base tied down by subscription stickiness. This, alongside high switching costs, acts as a sturdy shield barricading competitors while insulating Adobe from macro hurdles. The company’s venture into generative AI territory with offerings like Firefly further fortifies its position.
Over in China, Alibaba stands tall as the nation’s e-commerce and cloud infrastructure magnate. Encountering headwinds from various quarters including macroeconomic shifts, heightened competition, and tightening regulations, Alibaba’s growth story witnessed a dampening over recent years. While its e-commerce arm grapples with intensified antitrust regulations, the cloud division faces pressure from industry heavyweights like Huawei and Tencent. Nevertheless, as these storms subside, Alibaba holds the promise of resurgence.
Potential Valuation in Three Years
If all four companies stay on course with analysts’ predictions and maintain their price-to-sales ratios, then in three years, only Adobe is slated to surpass Salesforce in valuation:
|
Company |
Price-to-Sales Ratio (Current Fiscal Year) |
Estimated Market Cap (In 3 Fiscal Years)* |
3-Year Stock Price Growth* |
|---|---|---|---|
|
Salesforce |
6.5 |
$295 billion |
19% |
|
ServiceNow |
— |
— |
— |
|
Adobe |
— |
— |
— |
|
Alibaba |
— |
— |
— |
Note: *Assuming price-to-sales ratios remain steady.
Cloud Stocks Market Analysis and Future Projections
Reevaluation of Leading Cloud Stocks
In the volatile world of stocks and markets, numbers and trends provide a glimpse into potential futures. Consider Salesforce, a stalwart among cloud computing companies. Its dominance is unquestionable, with a market cap of $301 billion. But as the bear digs its claws into this tech titan, the market may see Salesforce’s P/S ratio dwindle down to a five-year low, spelling a valuation drop to $227 billion by fiscal 2027.
Yet, a phoenix may rise from these ashes. Enter ServiceNow, a company poised to spread its wings and soar. Projections indicate that its growth trajectory will outpace Salesforce’s, provoking a race where the tortoise overtakes the hare in the market cap stakes.
Alibaba’s Tumultuous Journey
Meanwhile, Alibaba stands at a crossroads, weighed down by the heavy burdens of international tensions. The ongoing strife between the U.S. and China casts a shadow over the company, compressing its valuations. However, should these tensions dissipate into the ether, Alibaba’s potential may skyrocket. Imagine a world where Alibaba’s P/S ratio doubles or triples, catapulting its market cap to an impressive $325 billion by fiscal 2027.
Potential Winners in the Cloud Arena
Amid these turbulent tides, there are whispers in the trading winds, hinting at potential victors in the dynamic cloud stock arena. ServiceNow, Adobe, and Alibaba emerge as promising contenders, each holding the promise of grander returns compared to the incumbent, Salesforce.
Once hailed as a growth stock colossus, Salesforce’s maturing business may signal an impending reevaluation. As the company tightens its purse strings and exhausts its expansion strategies, investors may cast a discerning eye on its future trajectory.
The Path Less Traveled
Should investors venture down the road less traveled, options beckon beyond Salesforce’s gates. The terrain may be treacherous, but with careful consideration, ServiceNow, Adobe, and Alibaba could paint a brighter financial sunrise in the forthcoming three-year epoch.
Final Thoughts
In the stock market theater, roles are versatile, and leading stars can quickly fade into the background. As the clouds part and reveal new horizons, wise investors may find solace in diversifying their portfolios with a sprinkle of risk and a dash of foresight.