Current high rates of inflation have caused several issues for growth stocks. This is down to two factors. Firstly, high inflation rates correspond with higher interest rates. As growth stocks rely on debt financing to fund growth, this can make costs soar and reduce or prevent profitability. Further, growth stocks rely significantly on the value of future cash flows. As inflation can depreciate these values, this is another reason for the recent sell-off. But I take a long-term view, and I believe that the recent sell-off has created several opportunities. Salesforce (NYSE: CRM) is one of my current favourites.
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, ranging from start-up companies to small start-ups. It recently acquired Slack in a $28bn deal, to enter the modern work communication and social media sector.
Since being set up in 1999, Salesforce has also experienced incredible growth. In fact, in 2010, the company recorded revenues of $1.31bn, yet in the past year, it recorded revenues of over $26bn. The growth is expected to continue in the future as well, as the company expects revenues of $32bn in 2023. This represents growth of over 20%. Further, by 2025, it is aiming for revenues of $50bn, showing the strong ambition of the business.
Unlike many other growth stocks, Salesforce has also reached profitability. Indeed, in 2022, it made net income of over $1bn. I feel that this is likely to grow in the future, as revenues grow, and costs can be cut.
My worries
However, I have slight concerns over the valuation of the firm. Indeed, even with the strong revenues from 2022, Salesforce still trades at a price-to-sales ratio of around 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 worry.
But overall, I’m willing to overlook this fact. For example, as already mentioned, Salesforce has reached profitability. Secondly, in comparison to many other software companies, its valuation isn’t too high. For example, Adobe trades on a P/S ratio of over 10, and ServiceNow, another software company, has an even higher ratio of 14.
My other worry is that due to inflation and soaring costs, companies around the world are going to start to cut their own costs. This could mean that these companies start spending less or cancel subscriptions with Salesforce altogether.
Why I’m still buying this growth stock?
Overall, despite these worries, Salesforce has a track record of high, steady growth. After being so heavily discounted, I feel that these risks are priced in to 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 buy, the quality of Salesforce is, therefore, too great for me to ignore. I may add some more of the shares to my portfolio.
