Salesforce.com Stock Analysis: Bidding War For Twitter

  2016-09-15_18-55-38  The article was written by Jacob Saphir, a Financial Analyst at I Know First.

Salesforce.com Stock Analysis

“The world is being re-shaped by the convergence of social, mobile, cloud, big data, community and other powerful forces. The combination of these technologies unlocks an incredible opportunity to connect everything together in a new way and is dramatically transforming the way we live and work.” Marc Benioff

Summary:

  • Fundamental Strength
  • Competitive Advantage
  • Reason for Acquiring Twitter
  • Competition
  • I Know First Algorithm forecast of CRM

Background:

Salesforce, Inc. (CRM) was co-founded in the year 1999 by current CEO Marc Benioff with a vision for a customer relations management company incorporating cloud computing.  Salesforce offers its clients the benefit of a one central database to analyze and monitor customers on demand without companies having to invest capital in servers and network infrastructures.  As a leading pioneer in this technology, the company has expanded into enterprise cloud computing solutions in sales, service, marketing, community, analytics, Internet of Things, and app cloud computing.  Seeing opportunity to expand and incorporate social media platform even further, Salesforce is expressing its interest in acquiring Twitter.   Twitter, Inc (TWTR) is a social media company founded in the year 2006, and headquartered in the same city as Salesforce in San Francisco, California.  The company offer users a platform to instantly create, discover, and share conversations within 140 character limit.  As we review Salesforce fundamentals, its competitive advantage, its reasons for bidding Twitter, and its competition, we maintain a bullish forecast.

Salesforce.com Stock AnalysisSalesforce.com Stock Analysis

Fundamental and Competitive Advantage:

Despite Salesforce experiencing net income losses up to $286 million between the years 2012 to 2015, the company’s fundamental is encouraging.  In the past two quarters, Salesforce has posted back to back returns of net income. Revenue has been consistently increasing from $2.267 billion in January 2012 to $6.667 billion in January 2016.  That is an increase of approximately 194% return in a span of 4 years.  For the past 2 years, its operating cash flow growth year over year grew by at least 34%.  Such growth has helped Salesforce achieve a 19.7% global share in the global customer relation management software market.  This is nearly double the size of its closest competitor SAP with 10.2%.  Given Salesforce’s competitive advantage in economy of scale, the company enjoys a high gross profit margin of 75%.

Salesforce.com Stock Analysis

Why Twitter and Why Now:

So, why is Salesforce inquiring about Twitter?  Although Salesforce features Twitter in its interface for users to connect with clients or coworkers, the main focus is Twitter’s large database.  Salesforce is investing its future in artificial intelligence (AI) Its product, Salesforce Einstein, will use artificial intelligence and machine learning from the data available to make predictions and recommendations for users in sales, market development, and more. Why is Salesforce choosing to pursue now?  Much like LinkedIn, maybe Twitter is looking for a buyer because of the same reasons LinkedIn faced before Microsoft merged with the company earlier this year.  Twitter’s growth rate, like LinkedIn, has seen a steady decline to the point they lost their position as the second largest social network after Facebook to its emerging competitors: Snapchat, WhatsApp, and Instagram.  Many argue Twitter’s inability to produce a net income in the past five years, is forcing the company to seek a buyout before accumulating even more debt.  Amidst Salesforce’s competition with other potential bidders, the company will need to seek financing to acquire Twitter.

Salesforce.com Stock Analysis

Competition: 

Disney (DIS) views Twitter as a potential avenue to fuel TV feed to its ABC network, ESPN, and Disney TV, and Disney films.  The board members speculate Twitter’s capabilities in live streaming six second clips to be shared among its users as a potential means to increase demand in viewership.  Disney may find itself in a more challenging position financially against its more cash rich competitors.

Alphabet, Inc. (GOOGL) may be looking to add Twitter with its largest subsidiary, Google. Many view Google as the most likely candidate to purchase Twitter.  Not only does the company have over $70 billion in cash to afford the asking price for $30 billion, Bloomberg suggests integrating Twitter could revive Google’s social effort after its social product, Google Plus, failed to compete against Facebook. As a leader in online marketing space, integrating with Twitter could increase its market share even more.

Microsoft (MSFT) has shown interest in acquiring Twitter.  In fact, this would not be the first time Microsoft was in a bidding war with Salesforce.  Microsoft outbid Salesforce to acquire LinkedIn in a $26.2 billion deal on June 13, 2016. A merger with Twitter would increase Microsoft’s social network market share to compete with Facebook. However, the recent purchase of LinkedIn and Microsoft’s announcement for a $40 billion repurchase program, makes Microsoft an unlikely candidate to organize the finance to acquire Twitter.

Conclusion:

We are maintaining a bullish forecast of the stock.  I Know First’s algorithm forecast the stock as a long term investment.

The forecast is color-coded, where green indicates a bullish signal while red indicates a bearish signal. Brighter greens signify that the algorithm is very bullish as it does at the top of this forecast. The signal is the number flush right in the middle of the box and the predicted direction (not a specific number or target price) for that asset, while the predictability is the historical correlation between the prediction and the actual market movements. Thus, the signal represents the forecasted strength of the prediction, while the predictability represents the level of confidence. 

Past I Know First Forecast Performance on CRM

In such as the one dated on August 26, 2015, the algorithm accurately forecast a signal for Salesforce.  In nearly a one year time span, the stock rose by 15.92%, beating the S&P 500 return of 10.16%. This translates to Salesforce surpassing the S&P 500’s return by approx. 56%.

If we were to compare the forecast back in August 26, 2015 to the latest forecast I Know First algorithm released as of September 25, 2016, we can see both forecasts rate salesforce.com as a buy.  The confidence level for a year forecast is close to the level as its previous forecast.  If the previous forecast last January accurately predicted the stock would increase, the confidence level registered in the latest forecast could indicate another bullish return.

This bullish forecast on Salesforce sent to I Know First subscribers on August 26, 2015.


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