Bold and far-reaching is one way to describe the recent move by software company Salesforce.com (Salesforce.com Stock Quote, Chart, News, Analysts, Financials NYSE:CRM) to acquire Slack for $27.7 billion, and while the strategy might win out in the end, Salesforce.com won’t have an easy time toppling the likes of Microsoft (Microsoft Stock Quote, Chart, News, Analysts, Financials NASDAQ:MSFT). So says portfolio manager Paul Harris of Harris Douglas Asset Management.
“One of the things with Salesforce is that it has acquired a lot of businesses, with Slack being their biggest purchase,” said Harris, partner at Harris Douglas, who spoke on BNN Bloomberg on Thursday. “And so I think it all comes down to how does Salesforce integrate Slack into their other businesses, and I think some of Salesforce’s acquisitions in the past have not been integrated that well.”
Salesforce dropped the news on December 1 that it had a definitive agreement to acquire messaging platform Slack for about $26.8 billion in cash and 0.0776 Salesforce shares for every Slack share. Already a customer relationship management (CRM) giant, Salesforce said combining forces with Slack was “a match made in heaven,” according to CEO Marc Benioff, who said the merger would bring about “the future of enterprise software” and “transform the way everyone works.”
The initial response by the market was none too bright, however, although investor reaction on December 1 was also mixed with impressions of the company’s simultaneously-released third quarter results, which forecasted slower-than-expected growth up ahead.
Salesforce’s share price did exceedingly well for almost all of the 2010-2020 period, including last year where the stock returned 37 per cent. But CRM stalled over the last few months of 2020 and then hit a pretty significant pullback with the twin December 1 releases. Since then the stock has been flat.
But Salesforce is nothing if not ambitious. Benioff has been clear about his plans to double the company’s revenue from the $25.5-billion projected for its fiscal 2022.
“I have a $50 billion (revenue) dream, which is what I’m shooting for,” Benioff said on CNBC’s Mad Money on December 1. “I feel very excited and motivated on everything that we need to do to double the company once again, and to make that happen we have to architect a complete solution.”
Salesforce reported fiscal third quarter 2021 revenue of $5.42 billion, up 20 per cent year-over-year, and EPS of $1.15 per share compared to a loss of $0.12 per share a year earlier. Analysts were calling for $5.25 billion in revenue and earnings of $0.75 per share. Looking ahead, management guided for fiscal fourth quarter earnings of $0.73-$0.74 on revenue between $5.665 and $5.675 billion. (All figures in US dollars.)
Harris said Salesforce, which recently joined the 30 companies that make up the Dow Jones Industrial Average, will need to get even bigger if it’s looking to take on Microsoft.
“The issue with Salesforce is, is the idea to compete with Microsoft (which is what some people think) and the other thing is how do they integrate that into a lot of what they presently do?” Harris said.
“If it is to compete with Microsoft then they are probably going to have to make more acquisitions to compete on things like Microsoft Teams and its Office products,” Harris said. “But acquisitions are always scary things because they’re all about execution. And [Slack] is now their biggest acquisition, so I think that’s really the key story over the next several quarters and maybe even the next several years: how they integrate it and actually grow their business.”
Slack also delivered quarterly earnings on December 1, where its third quarter fiscal 2021 featured revenue up 39 per cent year-over-year to $234.5 million and positive earnings of $0.01 per share. Both top and bottom lines beat analysts’ estimates.
Slack, which went public in a much-anticipated IPO in early 2019, is seeing strong uptake of its platform while the company registered 12,000 net paid customer additions, up 140 per cent year-over-year. At the same time, it’s unclear whether Slack will be come the widespread work communication model of choice going forward, something Salesforce is betting on.
“Remember, Slack was given away for free, basically, and then you have to pay for an upgraded thing if you want,” said Harris, “so, how Salesforce brings the rest of their clients onto Slack and whether or not they’ll pay, those are the big questions. I don’t think you’re see answers for the next little while, so the stock may be volatile because of that.”
“It’s hard to judge growth companies. The best way to look at these things is [ask] do their businesses have a moat? Are they almost not monopolies but oligopolistic in their nature that they can actually control their business?” Harris said.
“Salesforce has been able to grow their business very aggressively over the last several years [but] I think one of the things that analysts have found very difficult about the story is that they constantly beat their numbers but it’s been hard for analysts to gauge their what the company is going to do, whether they’re going to get to $50 billion or not,” Harris said.
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