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The current high inflation rate has caused some issues for growth stocks. This is for two reasons. First, a high inflation rate corresponds to a higher interest rate. Because growth stocks rely on debt funding to fund growth, it can increase costs and reduce or curb profitability. Further, growth stocks are highly dependent on the value of future cash flows. Since inflation can lower these values, this is another reason for the recent sell-off. But I’m looking at the long -term perspective, and I believe the recent sale has created some opportunities. Salesforce (NYSE: CRM) is one of my current favorites.
What does Salesforce do?
Salesforce is a cloud-based software company that provides customer relationship management software. This means that the company provides its applications to many different corporations, from start-up companies to small start-ups. It recently acquired Slack in a $ 28bn deal, to break into the modern work communication and social media sector.
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Since being set up in 1999, Salesforce has also experienced incredible growth. In fact, in 2010, the company recorded revenues of $ 1.31bn, but last year, it recorded revenues of more than $ 26bn. Growth is also expected to continue in the future, as the company expects revenues of $ 32bn in 2023. This represents growth of more than 20%. Plus, by 2025, it aims for revenues of $ 50bn, showing strong business ambition.
Unlike many other growth stocks, Salesforce has also reached profitability. In fact, by 2022, it will make a net income of more than $ 1bn. I feel it is likely to grow in the future, as revenues grow, and costs may be reduced.
My worries
However, I have slight concerns with the appreciation of the company. In fact, even with strong revenues from 2022, Salesforce is still trading at a price-to-sales ratio of approximately 7. Considering that annual revenue growth of 20% is lower than many other growth stocks with similar P/S ratios, this may be a slight concern.
But overall, I’m willing to ignore this fact. For example, as already mentioned, Salesforce has reached profitability. Second, compared to many other software companies, its valuation is not very high. For example, Adobe trading at a P/S ratio greater than 10, and Service Today, another software company, has a higher ratio of 14.
Another concern I have is that because of inflation and rising costs, companies around the world will start to reduce their own costs. This could mean that these companies are starting to spend less or cancel Salesforce subscriptions entirely.
Why am I still buying this growth stock?
Overall, despite these concerns, Salesforce has a track record of high and consistent growth. After so many discounts, I feel like these risks are priced at the company’s valuation. Therefore, I believe that Salesforce will be able to continue its steady growth over the next few years, and hopefully, at some point, shareholders will be rewarded with share buybacks and dividends. As a long -term purchase, the quality of Salesforce, therefore, is very good for me not to ignore. I can add a few more components to my portfolio.