CRM Stock Forecast: Datorama Will Take Salesforce To The Next Level

 

The article was written by Hieu Nguyen, a Financial Analyst at I Know First.

 

 

 

“Customer retention obviously has profound implications for all businesses: Finding a new customer costs from three to seven times more than keeping an existing one, and for many large companies, up to 95% of profits come from long-term customers.”

–PriceWaterhouse Coopers.

Summary:

  • The acquisition of Datorama will bring Marketing Cloud to a new leve
  • Next Generation of Cloud Einstein with AI application
  • Salesforce still remains as #1 in CRM
  • DCF model and I Know First algorithm agree in a long buy signal for CRM

 

(Source: Wikimedia Commons)

The acquisition of Datorama will bring Marketing Cloud to a new level

Earlier this week, CRM has announced a definitive agreement to acquire one of the biggest Israeli marketing analytics companies. This action one more time confirmed ambitions of Salesforce in applying AI in marketing. The deal is expected to be closed at $850 million.

Datorama is a company that provides AI-powered marketing intelligence as well as analytics platform for enterprises. The company has more than 400 employees in 16 offices all over the world. Datorama also has more than 3,000 customers including famous brands such as PepsiCo, Unilever, or Ticketmaster. With Datorama service, its customer can centralize marketing reports, optimize marketing performance, as well as make quick data-driven decisions using real-time dashboards.

Following the deal, Salesforce plans to set up a development center in Israel, joining 250 multinational development centers in the Start-up Nation. The employees from this center will join Salesforce’s Marketing Cloud development team. As a result, Datorama may help Salesforce to upgrade their business with more data integration, analytics tools via AI. The technology may also enable users to have more access and information from the data and make a better marketing decision.

The acquisition will strengthen the power of both Salesforce and Datorama. On the one hand, all of Datorama will be able to collaborate with the world leader in customer relation management. Datorama now can approach to more than 150,000 customers of Salesforce. Moreover, with the support of Salesforce, Datorama can develop and expand much faster. On the other hand, with the AI technology from Datoraman, Salesforce can accelerate its business in marketing cloud. Keep in mind that marketing and commercial cloud is the fastest growing sector of Salesforce in 2 years at more than 40% per year. With this acquisition, I expect this segment to continue to grow at more than 40% per year.

Next Generation of Cloud Einstein with AI application

On July 11, Salesforce also released the next generation of Cloud Einstein. In this generation, the company has combined its CRM with guided processes and a powerful AI to provide a better customer survice platform. The customer now can leverage machine learning as well as automate the routine service requests. Based on Salesforce, 80 percent of customers consider the experience that a company provides is as important as the products or services. However, providing a great experience for every individual customer has never been an easy job.

(Source: Silverline)

As introduced by Salesforce, the Next Generation will include Einstein Bots, Lightning Flow, and Einstein Next Best Action. The Einstein Bots will improve the customer’ experiences by responding immediately to their comments, gather basic information and handle it to the right agent in the shortest amount of time. Thanks to AI, Einstein Bots now can access and improve every single interaction. The Lightning Flow, on the other hand, will allow companies to deliver guided services to their customers. Einstein Next Best Action is another application of AI that leverages predictive models to deliver an intelligent recommendation for customers.

I predict the new generation of Cloud Einstein will retrieve the momentum growth of Services Cloud. The growth rate of this sector has been decreasing over the past 4 years. However, the application of the new technology will increase the platform efficiency. As a result, I predict this segment to grow at 30% in my valuation model

Salesforce still remains as #1 in CRM

2017 and Q1 2018 can be considered successful for Salesforce. The company witnessed a 26.67% growth rate in revenue and a double-digit growth rate in all of its sector. Moreover, for the first time in 4 years, CRM records a net profit. In fact, net income does not reflect the business model of the company. Salesforce can provide annual services to its customer and receive the money beforehand. This money will be recorded as deferred revenue since Salesforce has provided services to its customer. However, the company can use this money for R&D or SG&A.

Sales Cloud, which attributes one-third of the total revenue, continues to grow at 16.27% quarter over quarter compared to 16.13% in 2017. On the other hand, Marketing and Commerce Cloud had the highest growth rate at 41.14%. Service Cloud has retrieved its growing trend to 29.27% from 23.98% in 2017. The Gross Profit Margin also bring good news to investors as it increased from 79.04% in Q1 2017 to 79.67% in Q1 2018.

The net income also grew to $344 million mainly thanks to the good management in marketing and sales expense. The SG&A expense decreased from 50.06% of revenue to 47.29%. Moreover, as we discussed above, the company recorded a part of the money from customers to Deferred Revenue. As a result, despite of the net income is not high, the CFO continue to grow. CFO reached to 2,738 million in 2017 and to 1,466 in Q1 2018.

DCF Valuation gives a Long Buy Recommendation for CRM

 

Our 5-year DCF analysis arrives the target price of $176.21 for CRM, 19.37% upside from the current price. DCF model was constructed based on 3 main factors: top line and bottom line forecast, capital expeditures, and WACC. One third of the revenue comes from the Sales Cloud and I expect this segment to continue to grow at 15% over the next 5 years. As we mentioned above, I also expect the marketing and commerce cloud to grow at 40% while the service cloud grows at 30%. The CAPEX is expected to grow at 11% compared to 13.53% average in the last 4 years.

The most five important factor that will impact the value of the company is Sales Cloud, Service Cloud, Salesforce platform, Marketing and Commerce Cloud, and GPM. Margin. I ran a Monte Carlo Simulation with these three variables to see how the stock price will response to each variable. More than 50% of the result are within the Buy recommendation (20% above the current price) while 49.9% is a Hold recommendation (within 20% of the current price)

Conclusion

Salesforce has proved its market leader position in the customer relationship management industry. The revenue keeps growing at a two-digit rate and Salesforce started having profit in 2017. Moreover, the company is expanding its business by applying AI into its Einstein Cloud. Earlier this week, Salesforce bought Datorama, an AI marketing analytics company in Israel with the hope of applying AI in their Marketing Cloud services. Along with the development of the company, my DCF model also prove a BUY recommendation for Salesforces.

Current I Know First Forecast for CRM:

My recommendation is supported by the forecast of I Know First. On July 17th, 2018, I Know First issued a forecast for CRM with a strong 1-year bullish signal of 238.55 and a very high predictability of 0.61. In addition, the signal gets better over the time. The prediction totally agrees with the above arguments about the future of CRM.

 

Past I Know First Forecast Success with CRM:

On July 03, 2016, I Know First published a premium article saying that it’s time to Salesforce’s Stock. I Know First has been bullish on CRM’s stock on two time horizons. We suggested that CRM was undervalued by the time as all of the revenue continued to grow internationally as well as the company has potentials thanks to M&A deal with Demandware. From the below graph one can see that in 1 year after the article, Salesforce stock price jumped up by 11%.  I Know First algorithm successfully predicted the movement of the CRM stock price over all periods of time

(Source: Yahoo Finance)

Current I Know First subscribers received this bullish CRM forecast on July 03, 2016.

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