Setting Expectations for 2023

As we jump into 2023, I think most of us are expecting the economy to be more challenging than it has been in quite some time. The fed has hiked interest rates at an unprecedented rate in order to fight inflation. As a result, our companies are highlighting macro headwinds throughout their earnings calls as an explanation for the slowing growth.

In the next couple months, we will hear from all our companies as they set the stage for 2023. I personally think we are headed for a very difficult year, and it has made me begin to reset my expectations as to what good looks like for our companies. I believe it would be unfair to hold them to the same standard in 2023 as we have in years past.

In order to help define what good should look like for our companies, I figured it would be useful to look at past history. There isn’t a ton of historical information to review because SaaS as a whole is a fairly recent development and we have been in a strong bull market for quite some time. What came to mind was looking at how Salesforce performed during the GFC. Now, I am by no means calling for 2023 to be at the scale of the GFC, however, this was the best I could think of for looking at how a proven SaaS business held up during a recessionary environment.

I shamelessly pulled the majority of the data from @GauchoRico’s post from 2019. This is still hands down one of the best post I have ever read on this website. Thanks again for completing this, Gaucho.

Thankfully for us, at the time, Salesforce was about the size (in terms of revenue) of the businesses we typically discuss. This should help provide a decent baseline to compare with our companies. Below is some of their key metrics during the years leading up to and following the GFC.

TTM Rev YoY Growth Avg QoQ Growth FCF FCF Margin
2006 $497 60% 12% $90 18%
2007 $749 51% 11% $161 21%
2008 $1,077 44% 8% $169 16%
2009 $1,305 21% 5% $218 17%
2010 $1,657 27% 7% $367 22%
2011 $2,266 37% 8% $440 19%

As we can see, Salesforce was still able to grow 20% at a $1.3B run rate during one of the worst recessions our country has seen. This is pretty remarkable to me and displays the strength of the SaaS business model.

With that being said, they did see their growth rate get cut by more than half, however, this rebounded quickly in the following years. Their sequential growth rate only fell below 4.5% once throughout the great recession, highlighting the consistency and resiliency of their business.

Salesforce has been profitable since their IPO and the recessionary environment had little impact on their ability to produce FCF. While margins did drop slightly, the impact was minimal and they were able to increase this back to normal levels following the recession.

So, what does all this mean for our companies? For me, it means I expect all our companies to continue growing at a solid clip, regardless of the macro conditions. If Salesforce can grow at least 5% QoQ in the face of one some of the nastiest economic conditions we have seen, then I would argue 7-8% should be the floor for most our companies. Obviously, each company is different and depends on their scale, business model, sector, etc. but the point remains.

Salesforce’s history through the GFC also means I will have less leniency with regards to cash flows. Salesforce was still able to grow their FCF in terms of the raw dollar amount and the margins held pretty steady. In essence, I don’t think our businesses can use deteriorating macro conditions as an excuse for a lack of progress towards profitability.

In total, Salesforce shows us that regardless of how ugly the economy gets, our companies should still have the ability to continue growing at a decent rate. Considering the fact that it is very unlikely we see the economy collapse like it did in 2007-09, our companies should face less challenging headwinds. While some deceleration is normal as businesses scale, there is no reason to believe growth should fall drastically in 2023. If this were to happen, I am led to believe it would be more company specific versus something driven by macro. Yes, expectations are lower this year, but Salesforce has set a pretty high bar.

The one other big take away for me is that our companies are growing at rates and producing FCF that would make Salesforce of the early 2000’s jealous. For instance, Snowflake grew over 100% last year to $1.2B in revenue while producing $150M in FCF. Crowdstrike grew revenues to over $2B this year while growing north of 50% with 30% FCF margins. These kind of numbers blow Salesforce’s out of the water. This gives me encouragement that we are selecting the best businesses who are on a path to becoming giants like Salesforce. However, they are valued accordingly at multiples much richer than any ever given to CRM.

Lastly, please no responses to this post regarding the outlook on the economy. This is indicated to be a review of Salesforce performance and our expectation of what can be considered good for our companies in a more difficult environment.



Interesting considerations, Rex. Thanks for posting this.

One thing that has maybe become more important than we thought for our companies is valuation. I think the market will be more sensitive to it in 2023.
I’ve added a little to your analysis, just because I believe studying CRM’s history is particularly instructive. So I’ve gone through the SEC filings myself and completed your table with some more data, as well as the EV/TTM Revenue multiple for each year (obviously, such multiple changes continuously, so I calculated the market cap by taking the average share price of the 90 days following the company’s fiscal year end date – January 31st – so we’re talking about the average of the daily closing prices in the Feb 1st - Apr 30th time period).

CRM’s history is impressive, as can be seen in the numbers. I really hope most of our companies can replicate something close to that over time.

A few things are important to highlight in the historical numbers:

  1. CRM was generating a 23.4% FCF margin even when they had $310m of revenues, and this already puts this company in a different category.

  2. Granted, it was a different market back then, but in 2006, with 75%+ Y/Y growth and a 23.4% FCF margin, the company was valued at “only” 12x TTM revenues. 2006 was pre-GFC, and things were positive in the stock market. Might that 12x be compared to a 20x+ in a year like 2021 for a 75% grower with good FCF?

  3. In the depths of the GFC, CRM were able to grow revenues at 21.3%, which is the same rate they’re growing currently, with the (slight) difference that today they are making 23x more revenues.

  4. Valuation-wise, a compression of the multiple over time is inevitable: taking just the departure and arrival years of the table, for example, the Y/Y growth rate today is a quarter of what it was back in 2006, but the multiple is a little less than half. I hope we could see a similar path for our companies over time.

I also included a table of the companies I own, as a comparison:

What’s emerging here – to me – is that our (my) companies are still richly valued if compared to CRM’s performance history. And this is after their prices have been hammered very badly (as we all know).

Also, there’s no clear correlation between valuation and growth or FCF: SNOW doesn’t have the highest growth in this group, not even the highest FCF margin, yet it’s the highest valued of them all, by a wide margin. NET, the second highest valued, is a below 50% grower with still negative FCF. It’s hard to make sense of it all.

Anyway, I just wanted to follow up on your analysis and throw some food for thought out there.



At any point in time when we look at a high valuation, we can either say:

  • This price is way too high! This business will never make good on these expectations.
  • This is way too low! This business is crushing it! And the company results will be even better than this valuation suggests.

But in retrospect we can see that obviously Salesforce was in the latter situation. Why? Because the returns from owning the stock from 2006 at 12x have been not just market beating, but incredible! It’s easy to see in retrospect, because we know how the company grew. We know how durable the revenue growth was, and the FCF the company generated. That company performance is why the stock has done so well, and why the 12x multiple in 2006 was too low. We couldn’t know that then, but hindsight is 20/20.

And even if the multiple had been higher than 12x in 2006, the returns would have still been excellent. We can do some math and see if a 20x multiple or 30x multiple in 2006 would have still produced market beating returns. I’ll leave that math to anyone who is interested.

I think to make sense of it we have to remember that the durability of growth is everything. If Salesforce had not grown revenue and FCF like it did all those years, perhaps the 12x multiple in 2006 would have turned out to be “correct” or even “too high” rather than producing market crushing returns. Likewise, expected durability of growth is the reason for the different valuations of these companies now. That’s what prices/multiples/valuation correlate to. Current growth rate is only a point in time. What matters is how the future plays out.

I agree! Hopefully our companies will grow like Salesforce did since 2006…or maybe, dare I hope, even better!



Hi Bear.

I like the idea of “expected durability of growth”, and I 100% agree with what you say.

Not having the luxury of perfect hindsight, however, we can only rely on signals and hope that they are the right ones for detecting durable growth going forward.

In these incredibly successful durable growth stories like CRM, in my opinion, the most important skill over the years would have been holding on to the investment in the face of an obvious slowdown in growth.
I’m saying this because, for me and many other members of this board, evidence of a slowdown is often a sufficient condition to exit and redeploy the cash somewhere else. Sometimes it’s completely justified, other times – in hindsight – is a blunder.

So, I guess in evaluating future growth durability maybe we have to zoom out and try to assess whether we are in the presence of an outstanding business. CRM is clearly an outstanding business, but we know that now, after all these years of growth and FCF generation and having gone through the GFC (2008/9), the subsequent Sovereign Debt Crisis (2010/11) and the current brutal correction.

What makes an outstanding business, one that you are happy to hold in your portfolio through thick and thin?

Without going into the technicalities of what our companies make and just following the numbers (as Saul says), I think it does boil down on growth, gross margin, FCF generation, and a strong balance sheet (although I think this one is of slightly secondary importance, as it’s a consequence of all the above).

I had some free time this weekend and I went through the SEC filings to reconstruct CRM’s journey on a quarterly basis:

What stands out to me is the following:

  1. In 71 quarters – from Q1 of FY2006 to Q3 of FY2023 – they went from $64m to $7.8b in quarterly revenue; that’s a compound quarterly average growth rate of 7% (in other words, if you grow sequentially at 7% for 71 quarters, and you start at 64m, you get to 7.8b). Now, 7% doesn’t sound like a lot, and there’s been a clear slowdown over the years, but what’s impressive to me is the persistence of growth, quarter after quarter, no matter the external (macro) conditions. How do you know whether you’re dealing with such a persistent grower in advance?

  2. They’ve done the above while producing a Gross Margin in the range of 72.4% - 81.4%; there’s been a decrease over the years, and that may be physiological, but I think that’s impressive if you consider that 72.4% has been produced this year (in the midst of all we know) on TTM revenue close to $30b.

  3. They’ve always generated free cash flow. Always. Never a negative FCF quarter in 71 quarters. CRM’s FCF is seasonal (more so starting in FY2009), high in Q1 and Q4, low in Q2 and Q3, but always positive.

  4. They’ve had an (often substantial) net cash on their balance sheet in all but 14 quarters (including the last six, but this is due to the debt for the Slack acquisition).

  5. Valuation has come down steadily over the years in synch with the slowdown in growth. This confirms that valuation has a higher correlation to revenue growth and a (somewhat) lower correlation to GM and FCF (as said, these have both been regularly high over the years, yet valuation has come down).

Since its IPO in June 2004, the stock has returned 3,685% to date; that’s a 21.1% CAGR, even after the recent correction. I would take a 21% CAGR for 19 years every day. At its peak, in November 2021, the return from the IPO would have been 7,678% or a 28.3% CAGR.

What to make of all this? Two takeaways, to me:

  • When in presence of an outstanding business, one with persistence of growth, high gross margins, and good FCF generation, stick to it. It may slow down at some point due to size or due to unexpected macro conditions like today’s, but I think the most difficult (and important) exercise would be to try and look beyond a quarter or two. This is hard.

  • Assessing durability of growth is definitely the way to go, but it’s not in plain sight. If it were, I’d be rich and retired. How to detect it? I guess the aim is to find a balance between growth rate, size of the business and cash flow generation that would justify holding on to the company even in the presence of a slowdown. This is even harder.



Some caveats I’d like to insert here. While I am no Salesforce expert, I am at least aware of CRM in the past several years as buying up large companies in an effort to boost growth. And it might be safe to say (but ‘could’ be too early to say definitively) that by and large, these acquisitions have not been successful for its stock price.

Inorganic growth is something to watch out. CRM definitely has not been growing 7% QoQ on average organically.

Salesforce keeps a page listing their acquisitions:

Here are the top 3 largest acquisitions made:

  1. Slack – $27.7B (2021)
  2. Tableau – $15.7B (2019)
  3. MuleSoft – $6.5B (May 2018)

CRM’s stock price was $125 in May 2018.
Stock price today is $149 in Jan 2023
That’s a 19% stock price share appreciation in about FIVE years. With NO dividend payments.

Meanwhile, the SP500 has appreciated by over 50% (!!!) in the same timeframe, NOT even yet including dividends.

That is a massive strike against Salesforce, in my opinion…ever since acquiring any company over $2B in market cap size they failed to grow synergistically, as I believe the continual stock dilution outpaced any inorganic boost in growth over time.


CRM’s stock price was $125 in May 2018.
Stock price today is $149 in Jan 2023

That’s a 19% stock price share appreciation in about FIVE years. With NO dividend payments.

Meanwhile, the SP500 has appreciated by over 50% (!!!) in the same timeframe, NOT even yet including dividends.

Great find, Jon Wayne, and it sure makes our policy (of selling a stock with little or no growth, and reinvesting it in the Best of the Best), look good.



If it were easy, it would be too easy. I like to think Yogi Berra might have said that. But you’re right. You’re homing in on the crux of what we do here: try to discern if a company has truly durable growth, looking into the future – not just next quarter, but the long term as well. Following the numbers doesn’t only mean thinking about the short term. It’s not that easy. That’s why I’m emphasizing growth durability lately. Sometimes as you say, we have to look through negative macro. And to some extent, it takes time – time following a company for many quarters like we have with Datadog and Snowflake and others.

Durability, you nailed it. But how to detect it? It’s more than just the numbers. It’s the story around the numbers we’re seeing: the story about why we’re seeing them. We are constantly updating our thinking…and we will be wrong sometimes, because as you say, this is difficult. Which is why the discussions here are so valuable.

Honestly, I don’t think we press on with durability disagreements enough! I sold the last of my SentinelOne last week because of durability concerns. I sold most of my Crowdstrike in December for the same reasons. If I owned more than a small tryout position in anything we disagree on here, like Monday, Global-E, Transmedics, Gitlab, Clearfield, etc, I would continue to ask questions to try to sick the dogs of the board’s brain trust onto these companies to explore the investing thesis together. (Kudos to AnalogKid for continuing to try to do this with Transmedics…don’t quit!)

I will continue to think for myself of course, but I value the opinions of others here too. Especially on the crucial point of durability. That’s what we’re here for, right? Because someone else will see something I don’t yet.



Hard to say after a year like 2022. Before this meltdown, in November 2021, it looked like the acquisitions had been successful for the stock price:
May 2018 - $125
Nov 2021 - $307.25
which is a 145.8% appreciation over three and a half years vs. a +75.8% for the S&P500 over the same period of time.
What I’m saying is what’s been happening since Nov 2021 has been bad for everybody out there.
In the 53 quarters up until April 2018 (more or less when the first of the three acquisitions that you listed took place), CRM has grown quarterly revenue at an average compounded rate of 7.53% sequentially. So, yes, the subsequent acquisitions have slowed down somewhat that growth rate (7% vs. 7.53%), but not dramatically given the size that the business has gotten to.
Maybe it’s too early to judge whether these acquisitions have eroded value instead of creating it. What I see now is a behemoth of $30b in revenues growing at a 20-25% Y/Y (excluding the last quarter) with healthy margins and cash flow generation. I wish our companies could get to that size and still grow at 25% while throwing out loads of cash flow.


100%, Bear.

I, for example, think that CRWD will be a surprise this year, given how low they’ve managed to keep expectations. And, looking at the CRM case study, I can see a company that is going down pretty much the same trajectory in terms of size of the business and physiological slowdown of growth, with a very healthy cash flow generation. I still own both CRWD and S, but after today’s news about those executives jumping ship from S to CRWD I’m doing a lot of thinking. It couldn’t be just because SBC is underwater at S and they got a better deal at CRWD. There’s got to be something more fundamental than that.