Based on the factors that Benjamin Graham considered in analyzing potential stock picks, Salesforce is not a quality investment. Only investors with a high risk tolerance and a solid investment thesis on the stock will be interested in this large-cap Software company.
Salesforce Is Probably Overvalued
Graham devised the below equation to give investors a quick way of determining whether a stock is trading at a fair multiple of its earnings and its assets:
√(22.5 * 6 year average earnings per share (1.35) * 6 year average book value per share (59.571) = $16.63
After an impressive 44.0% performance over the 12 months, Salesforce is now trading well over its price because its Graham number is 1223.2% above today's share price of $220.04. Even though the stock does not trade at an attractive multiple, it might still meet some of the other criteria for quality stocks that Graham listed in Chapter 14 of The Intelligent Investor.
Impressive Growth, but Inconsistent Profitability and no Dividend
Salesforce’s average sales revenue over the last 6 years has been $24.09 Billion, so by Graham’s standards the company is large enough to warrant an investment. When published in 1972, Graham’s threshold was $100 million in average sales, which would be the equivalent of around a half million dollars today. Needless to say, this is the least important of Graham's requirements, and may be overlooked by all but the most conservative investors.
More importantly, Ben Graham believed that a margin of safety could be obtained by investing in companies with consistently positive retained earnings. Salesforce had negative retained earnings in 2015, 2016, and 2017 with an average of $1.5 Billion over this period. So the company is not accumulating enough cash over time by Graham's standards.
Graham also required a 30% or more cumulative growth rate of the company's earnings per share over the last ten years.To determine Salesforce's EPS growth over time, we will average out its EPS for 2008, 2009, and 2010, which were $0.15, $0.16, and $0.15 respectively. This gives us an average of $0.15 for the period of 2008 to 2010. Next, we compare this value with the average EPS reported in 2021, 2022, and 2023, which were $4.38, $1.48, and $0.21, for an average of $2.02. Now we see that Salesforce's EPS growth was 1246.67% during this period, which satisfies Ben Graham's requirement.
We have no record of Salesforce offering a regular dividend.
Negative Current Asset to Liabilities Balance and Not Enough Current Assets to Cover Current Liabilities
Graham sought companies with extremely low debt levels compared to their assets. For one, he expected their current ratio to be over 2 and their long term debt to net current asset ratio to be near, or ideally under, under 1. Salesforce fails on both counts with a current ratio of 1.0 and a debt to net current asset ratio of -0.7.
According to Graham's analysis, Salesforce is likely a company of low quality, which is trading far above its fair price.
| 2018-03-09 | 2019-03-08 | 2020-03-05 | 2021-03-17 | 2022-03-11 | 2023-03-08 | |
|---|---|---|---|---|---|---|
| Revenue (MM) | $10,540 | $13,282 | $17,098 | $21,252 | $26,492 | $31,352 |
| Gross Margins | 74.0% | 74.0% | 75.0% | 74.0% | 73.0% | 73.0% |
| Operating Margins | 4% | 4% | 2% | 2% | 2% | 6% |
| Net Margins | 3.0% | 8.0% | 1.0% | 19.0% | 5.0% | 1.0% |
| Net Income (MM) | $360 | $1,110 | $126 | $4,072 | $1,444 | $208 |
| Earnings Per Share | $0.49 | $1.43 | $0.15 | $4.38 | $1.44 | $0.21 |
| EPS Growth | n/a | 191.84% | -89.51% | 2820.0% | -67.12% | -85.42% |
| Diluted Shares (MM) | 735 | 775 | 850 | 930 | 1,001 | 997 |
| Free Cash Flow (MM) | $3,272 | $3,993 | $4,974 | $5,511 | $6,717 | $7,909 |
| Capital Expenditures (MM) | -$534 | -$595 | -$643 | -$710 | -$717 | -$798 |
| Net Current Assets (MM) | -$2,024 | -$4,449 | -$5,278 | -$2,919 | -$14,228 | -$14,095 |
| Long Term Debt (MM) | $1,720 | $3,176 | $2,673 | $2,673 | $10,592 | $9,419 |
| Net Debt / EBITDA | -2.32 | -0.77 | -2.17 | -2.82 | 0.02 | -0.34 |
