Salesforce, at an inflection point, has big ambitions
Salesforce.com last week once again announced quarterly results that surpassed expectations, producing revenue growth to keep the company on pace with CEO Marc Benioff’s ambitious goal of $35 billion by 2024.
Still, the San Francisco-based company trailed growth of other software as a service (SaaS) peers — including Zoom ZM,
Read: Nvidia’s future is bright as its many bets are paying off
A maturing company
While it has some of the cool factor of a SaaS company, Salesforce CRM,
Those two core product categories have seen growth level off compared to some of the explosive growth figures in SaaS, like Zoom’s run of 300%-plus growth quarters, including its most recent. In the fourth quarter, Sales Cloud posted growth of 11%, and Service Cloud’s was 19% — both segments lagged behind the company’s overall growth.
Some may see this as a reason for alarm, as they did with Amazon’s AMZN,
The arbitrary growth targets are a single variable in many considerations, from market share to available market to customer satisfaction levels and product development. For Salesforce, the company has hit a point where its core products have matured. This maturity, along with the need to meet changing customer needs, played a vital role in the company’s aggressive strategy in acquiring Mulesoft, Tableau and a pending $27 billion deal to acquire Slack WORK,
Salesforce migrates to hybrid
Those deals are foundational to the company recognizing the need to accelerate revenue growth. Perhaps more importantly, it’s clear that Salesforce is recognizing the need to meet shifting customer sentiment from pure SaaS to support hybrid IT requirements that address modern enterprise needs, the challenges of highly regulated industries and the requirement for data residency outside of Salesforce’s cloud.
The Mulesoft acquisition dealt with the need for a sophisticated approach to connecting legacy software to Salesforce. Tableau, one of the leading data visualization platforms, was almost entirely on-premises, and building a more hybrid approach became paramount to deliver a return on that deal.
The bet on hybrid is tying to the company’s now largest category, Platform. This category, which includes revenue from its growing platform offerings, including MuleSoft and Tableau, drove 26% growth in the fourth quarter, coming in at $1.8 billion. This category’s higher growth was critical in offsetting the slower growth in its sales and service clouds.
Slack holds untapped potential
The Slack acquisition announcement that came late last year was met with mixed reviews. Based on Slack’s slowing growth and sub-$1 billion revenue, there was some question about the $27 billion price tag that came with the deal. It’s easy to use this math to suggest the price was too high.
I liken this to IBM’s IBM,
The Slack acquisition provides significant new revenue and business opportunity for Salesforce. Last year saw exponential growth in demand for collaboration, with the likes of Zoom, Cisco’s CSCO,
This could be seen as the product and demand for Slack decelerating, or as a potential opportunity for Salesforce to apply its brand strength to a well-liked product that hasn’t been able to realize its potential fully. I see Slack immediately benefitting from being under the umbrella of Salesforce — especially the significant sales and partner channels to scale revenue generation.
Competition is fierce
I’ve been outspoken about Microsoft being a key competitor to Salesforce. Dynamics 365 has seen growth rates that have outpaced Salesforce over the past few quarters, including 39% in the most recent quarter. This means there have been some market share gains in that category for Microsoft. With the full offering of IaaS, PaaS, and SaaS for CRM, ERP, Service, and Customer Data, Microsoft will continue to rise and provide a significant challenge to Salesforce’s ambitions. This will also carry into the effort with Slack. Microsoft saw its Teams solution expand by more than 100 million users in 2020 and, given the ubiquitous use of Office and Office 365 by enterprises, Microsoft Teams has a natural gravity.
Of course, there are plenty of other big players in the space, including Oracle ORCL,
Salesforce is setting aggressive goals
Salesforce is at an inflection point, but the company’s ambitions continue to be big. Between stable growth of core segments and inorganic innovation, the company appears to be willing to execute and make strategic bets to reach those targets.
Competition, in particular from Microsoft, will be formidable, but the 11% growth taking Salesforce’s total addressable market (TAM) to $181 billion gives it runway to reach the $35 billion target.
Benioff mentioned $50 billion in a post-fourth-quarter earnings interview. This type of top-line growth most certainly leaves a runway for investors to benefit — and with the company’s track record for growth, it is hard not to see those goals as achievable.
Daniel Newman is the principal analyst at Futurum Research, which provides or has provided research, analysis, advising, and/or consulting to Nvidia, Intel, Salesforce, IBM, Microsoft, Amazon, Oracle and dozens of companies in the tech and digital industries. Neither he nor his firm holds any equity positions with any companies cited. Follow him on Twitter @danielnewmanUV.