The rumor that salesforce.com (CRM 1.63%) was in talks to purchase remote work darling Slack (WORK +0.00%) is now official news, and it's been greeted with a healthy dose of skepticism from the market. Salesforce shares were down as much as 10% the day after the concurrent third-quarter earnings update and Slack acquisition announcement.
Just as I have been doing for years, I'll be using other investors' skepticism to add to my position in the cloud-based customer relationship management company.
Image source: Getty Images.
Building an operating system for the future
Salesforce's acquisition-happy strategy is well known, but some investors aren't fans. The last few years in particular have featured big blockbuster deals (MuleSoft, Tableau, now Slack) punctuated by smaller ones along the way. These are usually paid for with a combination of cash and issuance of new stock, the former a drag on profitability and the latter an event that dilutes ownership for existing shareholders. It isn't for everyone, but Salesforce's heavy-spend strategy has nonetheless been very successful at handily outpacing new share creation with even faster profitability growth.
However, it's been clear for years (at least in my mind) that the software company's real goal hasn't been maximum profits, but rather to transform itself from a niche cloud computing service to a primary software platform of choice powering all of a company's modern infrastructure and operational needs. Adding Slack now more clearly defines this. The tie-up, expected to close by the second quarter of next year, is being described by Salesforce CEO Marc Benioff and company as creating "the operating system for the new way to work."
That phrase "operating system" is key. Salesforce has built an incredibly popular ecosystem of apps ranging from customer to commerce to data management, and recent acquisitions have been focused on making it easier for Salesforce users to integrate and make sense of all the disparate data they have. But to continue its march forward as a full-blown tech platform, a primary business operating suite is crucial if it's going to catch up to the likes of Microsoft (MSFT +0.17%). Slack will become the backbone of said operating system and help connect users and data in the new remote work world that has suddenly become reality.
But the question now is whether the price tag is worth it. Salesforce will shell out $26.79 in cash and 0.0776 of its own stock per share of Slack -- valuing Slack at nearly $28 billion at the time of the announcement. It will be Salesforce's biggest takeover yet, and a hefty premium for a company that hauled in just $834 million in sales over the last 12 months (although Slack did report 39% year-over-year growth during its most recent quarter).
However, as is always the case with Benioff and his team, it isn't the individual part that's important, it's how it transforms existing services overall. And Slack's work to grow beyond an internal communication and collaboration tool to one that also extends to communication and collaboration with an organization's suppliers and customers jibes with Salesforce's vision.
Turning blockbuster purchases into game-changing services
There's reason to believe this will work. Benioff has been masterful at plugging acquisitions into Salesforce and growing them into something much larger than the sum of their parts. Take the Commerce and Marketing Cloud segments, started up a few years ago (primarily with Demandware in 2016, purchased for $2.8 billion). Benioff said on the last earnings call that the two e-commerce segments processed more than 31 million orders in the last quarter, up 62% year over year.
The Platform segment, digital data integration services started by MuleSoft (acquired in 2018 for $6.5 billion) and Tableau (acquired in 2019 for $15.7 billion), also continues to grow at a fast pace and power companies' digital transformation by making it easier to gain insight from data and build new applications. All of these segments complement the still-expanding customer sales and service relationship bread-and-butter where Salesforce got its start.
|
Business Segment |
Segment Revenue 3 Months Ended Oct. 31, 2020 |
YOY Change |
|---|---|---|
|
Sales |
$1.31 billion |
12% |
|
Service |
$1.38 billion |
21% |
|
Platform and other |
$1.59 billion |
24% |
|
Marketing and commerce |
$804 million |
25% |
Data source: Salesforce. YOY = year-over-year.
Put simply, I like Salesforce's chances at doing it again with Slack, at using a smaller growing software firm to augment its own trajectory and set itself up for future expansion. Management provided an initial outlook for next year in which it sees its revenue growing another 21% to $25.5 billion (up from the expected 23% growth to $21.1 billion this year). Sure, Slack will be a big help, but early guidance for the fourth quarter of this year and first quarter of next year calling for 17% year-over-year growth in each period ex-Slack demonstrates that Salesforce has organic momentum on its side too.
Further down the line, Benioff has started talking about how Slack and the new "operating system for the future of work" has laid the groundwork for his company eventually reaching $50 billion a year in revenue. Getting there will no doubt entail more big acquisitions. But I love the worry that's presently pushing shares down. If history repeats itself, the market will fret over the purchase cost, and the stock will tumble, only to eventually reverse course when Salesforce reports an "acceleration" in its growth due to said acquisition. I'm thus buying, but with my focus on the long-term prize as the company aspires to eventually be among the largest technology firms in the world.
