Why Salesforce is a Force Multiplier

Jon Markman

Salesforce.com ((CRM) -Get Report) reported blowout Q2 earnings last night and revised guidance higher for the rest of the year. The great digital transformation is alive and well. Buy the stock even at this elevated level on pullbacks.

Salesforce.com operates a customer relationship management platform widely used by enterprises to drive sales. For many businesses, it’s the front line of digital transformation.

Wednesday’s financial results show businesses are digging in.

Salesforce holds a key advantage. The San Francisco, Calif.-based company doesn’t only operate the largest CRM platform. It is widely considered the best.

More than 100,000 companies use the Salesforce platform. The software is consistently ranked highest in the Gardner Magic Quadrant. And although it is the market leader, with 19.6% of the $120 billion CRM sector, its share is growing faster than the competitors.

Salesforce’s strength is its ecosystem.

Third party developers are eagerly building applications on top of the platform. This rush of developers creates powerful network effects, making the platform even more valuable to developers and the companies that use it. It’s a huge competitive advantage that allows Salesforce managers to make significant new investments in artificial intelligence and other connective tissue that embeds the platform deeper into the corporate world.

For example, at the end of 2018, Salesforce had business relationships with 83% of the Fortune 500. Market penetration at the Fortune 100, at 95%, was even more impressive. That’s a stranglehold.

Adidas, the German sportwear giant, uses Salesforce to connect with and keep track of its customers online. It tailors new products and sales campaigns in real-time using digital data from online clicks, impressions with brand ambassadors, and sales at retail partners worldwide.

Going into Salesforce’s second quarter earnings report, investors feared companies might cut back spending for such projects. For many, digital transformation projects seemed a likely casualty of the global pandemic. Salesforce managers slayed those fears. Revenues jumped to $5.2 billion, a 29% increase from last year. More important, billings, a leading indicator of future business spending, jumped 35% to $4.75 billion.

Corporate managers are certainly not curtailing their digital plans. They’re accelerating spending.

During the past two years Salesforce managers have been busily building for this moment. They added new AI engines to the platform and have enticed developers with more financial perks.

A LinkedIn post in June from Don Robbins, a technical educator at the company, spoke about the average salary for platform developers being $117,000 and the many new opportunities likely to arise from corporate investment in developer tools and engines.

Salesforce has made a number of key acquisitions managers hope will set the company on a course to $60 billion in sales by 2034. For example, Salesforce bought Tableau for $15.7 billion in June 2019. The data analytics and visualization company, helps developers build data rich applications faster.

Salesforce shares moved to a new high earlier in the week on news the company was being added to the Dow Jones Industrial Average. The stock is ahead up 26% today, to $272.30, on the better than expected results.

I have been a Salesforce bull for 10 years but the prospects for the company have never been better. Digital transformation, and the company’s lead, will drive a huge upward revaluation in the share prices. The change is coming faster than investors realize.

Longer-term investors should not be afraid to buy modest pullbacks.