It can be scary to invest during a bear market. For seven consecutive weeks now, the Nasdaq Composite (NASDAQINDEX: ^IXIC) has moved lower in price, the first time that has happened since 2001.
However, seasoned investors know that downturns can be a good time to buy stocks. While some speculative stocks will falter for months or years to come, others (especially those with solid fundamentals) will recover from the recent downturn.
The trick is to separate the wheat into chaff. Which companies will return, and which will not? One way to determine this is to find talented companies with established business models. Let’s examine one such name: Salesforce (CRM 1.73%).
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Revenue growth remains strong
Salesforce was incorporated in 1999 and went public in 2004. It employs more than 73,000 people, and its current market capitalization of $ 159 billion makes it the 41st largest company in America, four places below McDonald’s and eight places ahead AT&T.
The company provides customer relationship management (CRM) software to over 150,000 clients and holds nearly 32% market share in the industry. CRM software helps businesses track, organize, and manage client relationships and data. For large businesses and small, CRM software can replace multiple spreadsheets or databases with an all-in-one tool that tracks leads, customers, and tasks in one location accessible to multiple employees. Salesforce also owns well-known applications such as Slack (which Salesforce acquired worth $ 27 billion in 2021) and Tableau, a web analytics tool.
CRM revenue (quarterly YoY growth). YCharts data. YoY = year to year ..
As illustrated in the chart above, Salesforce has been able to maintain rapid revenue growth. Quarterly sales growth is at 26%, impressive for a company with over $ 26.5 billion in total revenue in 2021. And with that figure expected to reach $ 32.1 billion in 2023 and $ 37.9 billion in 2024, Salesforce is poised to extend its double-digit growth rate.
Moreover, free cash flow per share was $ 5.43 in its most recent quarter, showing that the company is generating adequate cash flow, even though revenues remain small.
Salesforce’s valuation is nearing a historic decline
Because Salesforce’s earnings per share (EPS) have alternated between positive and negative over its nearly 20 years as a public company, price-to-book (P/B) may offer a greater good measurement metrics. The P/B ratio is calculated by dividing its stock price by its book value per share (total assets minus total liabilities). A lower P/B ratio is – in general – preferable and indicates that a company’s stock is cheap compared to the strength of its balance sheet.
CRM price to book value. YCharts data.
As you can see, Salesforce has never been cheaper on a P/B basis – and it’s significantly cheaper than many of its peers in the software industry, such as Service Today (21.7), Working day (9.2), and be Microsoft (11.6).
Is Salesforce a Purchase?
Salesforce’s growth rate remains impressive, its free cash flow is solid, and its price-to-book valuation is the lowest ever. For investors willing to buy and hold, this seems like a screaming buy.