Building data center capacity only as needed has fueled CRM stock's recent gains.
Every large enterprise would like the hybrid cloudsalesforce.com(NYSE:CRM) has built for itself. CRM stock is off 3% since the start of September.
Salesforce has its own network ofdata centersbut it’s far from being a Cloud Czar. Over the last 12 months Salesforce’ capital spending has been just$657 million. True Cloud Czars likeAmazon(NASDAQ:AMZN) spend billions in cash flow each quarter on data centers.
But by combining public clouds with its own resources, Salesforce gives its customers the impression that it, too, is a Cloud Czar. That’s what every company now wants. They want the flexibility of the cloud, but the surety of their own hardware.
They want what Salesforce has.
Pandemic Stokes CRM Stock Market Cap
Despite this month’s decline, Salesforce’s market capitalization has nearly doubled since the start of the pandemic, to $217 billion as CRM stock gained 59.4% in the last 18 months.
For the quarter ending in July, it had net income of $535 million, or 56 cents a share fully diluted, onrevenue of $6.34 billion.It’s projecting growth of nearly 25% this year, total revenue of about$26.2 billion after the acquisition of Slack.
Reporters call it a“pandemic fueled demand for cloud services,”but it’s just an acceleration of trends that were evident before the health crisis started.
Salesforce has built partnershipswithMicrosoft(NASDAQ:MSFT),withAlphabet(NASDAQ:GOOGL), andwithAmazon, building its own capacity where it can assure profitable traffic.
Salesforce owns some cloud, rents some cloud, but manages its cloud, so this is all transparent to customers. It’s also turning the old model of infrastructure, platforms and servicesupside-down,delivering full application suites.
By operating on this hybrid model, Salesforce can assure that customers abide bylocal privacy lawsanddata localization laws.
Software Is King in the Cloud
The success of this hybrid cloud approach is transforming the cloud market.
Salesforce is now consideredthe leading industrial cloud, ahead of Alphabet and Microsoft.
You no longer need to invest $1 billion per quarter of cash flow to become a cloud player. Just use public clouds to fill in capacity and build your own as-needed. This means software companies likeAdobe(NASDAQ:ADBE) and even consumer companies likeWalmart(NYSE:WMT) can develop their own clouds at their own pace, and gain independence from the Cloud Czars — the same independence Salesforce now enjoys.
Customers don’t see data centers. They see services like aSales Cloudora Health Cloud. Software is now driving what had been a hardware cloud market.
That’s why Salesforce bought Slack.It paid $27 billion for what amounts to a corporate user interface, making it a direct competitor to Google and Microsoft. As CEO Marc Benioff said on his latest earnings call, “If you’re starting a new company, you’re not planning physical office place — you’re planning digital office space.”
After spending the last decade building or renting huge skyscrapers, including its own San Francisco headquarters, Salesforce is now tearing it all down. Instead of going to offices, its workers will remain largely virtual. Instead of going to trade shows, Salesforce isbuilding its own streaming service.
The Bottom Line
Despite becoming a cloudless Cloud Czar, Salesforce is only growing as fast as its market. Seen over the last year or even the last two, CRM stock’s performance trails that of theS&P 500 index. Smaller companies, likeServiceNow(NYSE:NOW), are outpacing it.
The benefits of hybrid cloud Salesforce pioneered are now flowing toward companies with a smaller revenue base. That’s the way open source and cloud work. Everyone wins.
Analysts still love Salesforce.Noneof the 35 tracked byTipRankssays sell. But Salesforce is now a conservative investment, a consistent winner but no longer delivering thatmuch-beloved “alpha,” return exceeding the market average.
That might change with Slack in the fold, but right now average returns look like a big win.
