There’s a distinct pattern to the action of salesforce.com (NYSE:CRM) stock. When it makes a big acquisition, the shares fall, relative to the NASDAQ average. As the acquisition is absorbed, CRM stock rockets ahead of the average. Then, Salesforce makes another deal.
This happened with Mulesoft in 2018. Then again with Tableau in early 2020. It’s happening again with the approaching acquisition of Slack Technologies (NYSE:WORK).
It makes sense. Organic growth in tech is hard to come by, but buying growth is expensive. Slack is costing $27.7 billion, while bringing less than $1 billion in revenue. The value comes from integrating acquisitions into the larger whole.
Salesforce says it will make rebuild its applications to become “Slack-first,” making Slack its primary user interface.
Salesforce Slowing?
To hedge funds, every stock they buy should seem to come from Lake Wobegone. All the children must be above average.
The Slack acquisition has yet to be approved by regulators. That’s true for most tech deals in 2021. As a result, CRM stock has not been above average. Year-to-date, shares are up about 9%, while the NASDAQ Composite index is up over 11%.
While 35 of the 47 polled analysts following the stock say buy it, their average one-year price target is just 16.5% ahead of where it is now. Hedge funds are reportedly cashing out. They’re looking for faster growth and questioning whether Salesforce can get new deals done.
Then there’s a coming transition at the top. Co-founder Marc Benioff is stepping away. Bret Taylor, who came with the 2016 Quip acquisition, is being groomed to replace him. Taylor is getting a big press build-up but there’s always uncertainty, especially when the new boss is just 42.
Taylor, who did time at Alphabet (NASDAQ:GOOGL) and Facebook (NASDAQ:FB) before launching Quip, is focused on making Salesforce.com software more user-friendly. Slack is part of that strategy. The aim, as chief technology officer Parker Harris explained recently, is to let companies create applications with less code, even no code. This will move power over computing away from programmers and back to management, which is where management likes it.
Salesforce Accelerating?
The Salesforce.com strategy is why analysts still recommend Salesforce.com stock.
The platform is now number four on the Cloud Wars list of cloud vendors, behind only Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN) and Alphabet. Its April quarter was its best ever, with sales up 21% from a year earlier, and five times the net income.
Salesforce is tying itself more closely to Amazon, which lacks an application suite. The core businesses, including those Mulesoft and Tableau acquisitions, are doing fine. Slack should show the same trajectory.
The next growth engine may be an internal effort, an artificial intelligence (AI) engine called Einstein, introduced in 2016. Einstein works in the background of applications. Slack is meant to bring it to the foreground. The result, Salesforce hopes, will be more ethical AI development, at least more closely controlled AI development.
The Bottom Line
Salesforce is no longer a stock you buy to beat today’s market. It’s a stock you buy to keep up with tomorrow’s market.
While you could time purchases of Salesforce against big acquisitions, you could also sit on it and let time work for you. It’s a tech company you can buy and hold with confidence, the kind of stock you can buy for your kids. It’s the kind of company you don’t have to read about every day to believe in.
Salesforce is making permanent changes it made during the pandemic, changes that have given it a reputation as a great place to work. You can buy it for the Marc Benioff show, or for the Bret Taylor show. Either way, it’s a buy.
On the date of publication, Dana Blankenhorn held LONG positions in MSFT, AMZN and FB. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.