Growth stocks have been battered over the past few months, as investors have shifted towards value stocks. This is due to inflationary fears, alongside the steep valuation of many of these stocks. But while there are certainly risks in investing into growth stocks, this does not mean that I’m staying away. Instead, I believe that this recent drop offers a great time to buy some on the dip and hold for the next few years. Salesforce (NYSE: CRM) is one stock I think has a particularly bright future. Here are the reasons why I’ve bought recently.
What does Salesforce do?
Salesforce is a consumer relations management platform, which provides cloud computing solutions. The company’s clientele includes government entities and a variety of companies ranging from giant corporations to small start-ups. It has also made several large acquisitions in the past few years, including Tableau in 2019 to improve its data-analytics side and most recently, Slack for $28bn, so that it can enter the modern work communication environment.
The company’s results have also been incredibly strong. In fact, in the first nine months of 2021, it reported revenues of over $19bn, a 20% increase year-on-year. For the full year, it is also expected to record revenues of around $26.4bn, demonstrating the excellent growth of the firm.
Following the company’s excellent history of integrating and growing acquisitions, I’m also confident that it can do the same with Slack. Hopefully, this will enable the firm to reach its goal of $50bn of revenue by 2026. This target requires 17% compounded annual growth each year, which seems very attainable considering results in recent years. If it’s able to reach this goal, I feel that the Salesforce share price could soar in the long term. This is why I recently bought this growth stock, and plan to hold it for at least the next five years.
Are there any key risks?
There are two main key risks. Firstly, there is the company’s large valuation, despite the recent drop. Indeed, based on its revenue predictions for 2021, it has a price-to-sales ratio of just under 10. This implies that large growth is already pencilled into the stock’s valuation. It also has a price-to-earnings ratio of 140. While this is not overly large in comparison to other growth stocks, and it’s promising to see profitability, it does mean that signs that growth is slowing will be punished.
This leads onto the second main risk that growth may be slowing. Such a fear comes after UBS analyst Karl Keirstead downgraded the stock to neutral, stating that business customers were starting to trim their spending. This could have a negative knock-on effect on Salesforce, as customers start spending less or cancel subscriptions altogether.
What am I doing with this growth stock?
Salesforce stock has significantly fallen back from its highs last November. But I feel that now is a great time to buy on a discount, and I have done this recently. Due to the company’s large growth prospects, alongside its record of making shrewd acquisitions and integrating them into the company, I’m planning on holding this investment for the long term and may continue to buy more if it dips further.
