Artificial intelligence (AI) is the hottest topic in tech right now. In fact, giants like the Magnificent Seven are innovating at the speed of light, and investors just can't seem to get enough of it.
Beyond the biggest tech giants, a number of enterprise software companies are garnering interest from Wall Street. Salesforce.com (NYSE: CRM) This is one of the most interesting case studies related to AI software.
Salesforce shares have fallen about 12% since the beginning of the year, well below expectations. Nasdaq Composite Index and S&P 500 Still, I see the company as a compelling investment opportunity and believe the stock is extremely cheap.
Salesforce Diligence
Since 2018, Salesforce has spent roughly $50 billion to acquire three companies: MuleSoft, Tableau, and Slack.
To put this in perspective, Salesforce only generated around $35.7 billion in revenue over the past 12 months. Considering that the three companies mentioned above have been part of the Salesforce ecosystem for several years now, it is fair to conclude that Salesforce may not be fully monetizing these assets.
Plus, given that artificial intelligence (AI) is now a cornerstone of the tech sector, investors don't seem too concerned that Salesforce's revenue growth in its most recent quarter, which ended April 30, was just 11%.
On the surface, I think these concerns are valid, but a closer look at the company's most recent earnings report reveals areas where Salesforce is experiencing impressive growth and, more importantly, shows that the operational efficiencies management has pursued are finally starting to pay off.
Beyond Revenue
While the headline numbers on an income statement can help provide insight into a company's revenue and profitability profile, focusing too much on these metrics can cause investors to miss the bigger picture.
The chart below shows other financial metrics we would encourage investors to analyze.
There are a few key themes to discuss here: First, Salesforce's gross margins have improved dramatically over the past few years, as has its cash flow position.
This dynamic is working exactly as planned: “We've more than tripled the cash we were generating just four years ago,” CFO Amy Weaver said in the company's most recent earnings call. In short, Salesforce's revenue is growing just 11% a year, but its free cash flow is growing more than 40% a year.
To me, strong growth in cash flow generation is far more important than revenue trends.
Salesforce Stock is a Great Bargain among AI Software Investment Opportunities
The chart below compares Salesforce to other leading enterprise AI software companies on a price-to-free cash flow (P/FCF) ratio.
Among these peers, Salesforce has the lowest P/FCF multiple, and not even close. We believe investors are missing the bigger picture when it comes to Salesforce and its potential as a leading AI opportunity.
It's important to keep in mind that revenues go up and down from quarter to quarter. Additionally, on a macroeconomic level, the past few years have seen inflation spikes with effects that have lingered even after inflation has subsided. With that in mind, it's no surprise that businesses of all sizes are curbing spending and operating on tighter budgets, a move that directly impacts Salesforce's ability to grow revenue.
It's also important to point out that the company's integration and analytics business, which includes Tableau and MuleSoft, was Salesforce's best-performing business in the first quarter, growing 25% year over year.
I think Wall Street was right to start demanding more growth from the assets Salesforce acquired, but as the AI story continues to unfold, I think the company is only scratching the surface of its potential.
We believe we are well on the way to seeing revenue acceleration as Tableau, MuleSoft and other services begin to make up a larger portion of Salesforce's overall business, which should further contribute to improved margins and cash flow for the company.
I believe investing in Salesforce is a no-brainer right now. The company's stock is trading at a significant discount to its peers and is underperforming the overall market, making Salesforce look extremely cheap.
Should I invest $1,000 in Salesforce right now?
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Suzanne Frey, an Alphabet executive, is a director of The Motley Fool. Adam Spatacco has invested in Alphabet and Microsoft. The Motley Fool has invested in and recommends Alphabet, Microsoft, Oracle, Salesforce, ServiceNow, and Snowflake. The Motley Fool recommends long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
1 Amazingly Cheap Artificial Intelligence (AI) Growth Stocks to Buy Now was originally published by The Motley Fool.
