Salesforce Is Top Pick at RBC - Here's Why

Salesforce is upgraded to top pick from outperform at RBC Capital, which also raised its price target on the stock.
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Shares of Saleforce.com (CRM) - Get Report should get a boost from a bullish note from analysts at RBC Capital who upgraded the stock to top pick from outperform.

The firm also raised the stock's price target to $215 from $200, which represents a potential upside of 30% from the stock’s previous closing price of $166.17.

“Salesforce has become the trusted vendor for large enterprises in their digital transformation and modernization journeys. With the company guiding to 20%+ revenue growth over the next 4 years (through FY24) and underscoring that this long-term outlook is not predicated on future M&A, the company is bullish on its organic growth prospects,” said analyst Alex Zukin.

The analyst said he sees the data mining company's fiscal 2020 fourth-quarter guidance as conservative after considering the company’s already issued fiscal 2021 revenue guidance. Fiscal 2020 will be a “digestion year” after the company engaged in numerous merger and acquisition activities in fiscal 2020.

Salesforce issued 2021 revenue guidance between $20.8 billion and $20.9 billion, short of analysts' $20.95 billion expectations. 

That M&A activity will drive margin expansion in fiscal 2021, which should unlock the upside potential of the company’s share price. Even though the company’s growth rate isn’t sustainable long-term, according to Zukin, there is still enough fueling Salesforce’s premium growth for a bullish outlook on the company.

“While deceleration is inevitable, we think Salesforce can continue to drive premium growth for its size and it remains an important strategic asset,” Zukin wrote.

The firm’s $215 price target is based on its 33x 2021 free cash flow estimate, a premium over the rest of Wall Street’s expectations for the company.