Salesforce(CRM) is to the best of my knowledge the first and oldest company built around the SaaS business model. I thought it might be instructive to look at where they are at 19 years after being founded. Quick note, some might say Concur was the first but they were acquired, information was difficult to find and they had multiple business model transitions.
Salesforce ultimately provides a customer relationship management tool with many different subsets. Check out their website www.salesforce.com for more. No reason for me to waste space here.
MarketCap
CRM 92.5 billion
SHOP 14.6 billion
Revenue
CRM 10.48 Billion grew 25%
SHOP 683 Million grew 73%
Free Cash Flow
CRM 2.74 Billion !!!
SHOP ~8 million
Efficiency Score (Revenue growth + FCF/revenue*100)
CRM 0.51
SHOP 0.7 (i think in a previous post i had this at 0.6 as a typo)
Just as a reminder the efficiency score allows us to compare companies’ revenue growth with those that are using free cash or generating it.
EPS
CRM
GAAP 0.17
Non-GAAP 1.35 (biggest difference was because of stock based compensation)
SHOP
No earnings
Efficiency of Capital (higher is better) how much revenue the company generates from its capital.
CRM 0.5
SHOP 0.6
Operating Leverage efficiency
CRM couldn’t find an exact number but looks like around 30%
SHOP 56%
EV/S 2018, 2019
CRM 8.5, 7.1
SHOP 20.5, 13.5
I don’t know about you guys but looking at salesforce gave me a glimpse of what our companies can do in the future. I find it pretty incredible that a company with 10 billion in revenue can have an efficiency score of 0.5, generate 2.74 billion of FCF and is projecting to reach 20 billion of revenue by 2022. I only compared shopify because it is a little more mature than many of the other companies we look at. At some point SHOP’s revenue growth needs to slow down but by that point hopefully their operating leverage and margin are at a point where they can throw off large amounts of free cash. Salesforce took something like 17 years to start showing profits. SHOP could generate more Free Cash Flow but that would slow down its growth. I hesitate to call what i am going to do a model. Lets just call these probably wrong possibilities. So lets say SHOP can grow revenue at 45% for the next 5 years, They would have about 7 times the revenue they generate now. I would expect their EV/S to decrease to maybe 10 which is more in line with historical norms. That would get us something close to 3.2 the value of today. The “model” can be changed pretty drastically if revenue growth is only 30% then our EV/S probably would drop down to the 6 range. In that case the stock price would be about 10% higher than it is today. In the first scenario we get a CAGR of about 26% which is pretty darn good. The second scenario is 2%…not so good. Personally I think we are in a generational switch to SaaS services. I think we are seeing these higher multiples because the business cycle is good, companies have money to spend and that our board had benefited from being in the right place at the right time as the EV/S of the entire SaaS sector have expanded. I think the business cycle will continue to be good until it isn’t… and then we will have contracting EV/S and probably some slower growth. When this happens is anyones best guess.However, I do like that our quickly growing companies still have plausible scenarios that we can make a lot of money (nothing like we have in the past 18 months) over the next 5 years.
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Ethan,
Kudos to you for your efforts to better understand your investments. Hope
what follows helps you.
I thought it might be instructive to look at where they are at 19 years after
being founded.
How about looking at where they both are three years after IPO?
Market Cap
CRM 5.1 billion
SHOP 14.6 billion
Revenue
CRM 497 million grew 60%
SHOP 683 million grew 73%
Free Cash Flow
CRM 89 million
SHOP -16.4 million (Ethan: for FCF you have to subtract capital expenses)
Efficiency Score (Revenue growth + FCF/revenue*100)
CRM .8
SHOP .7
EV/S
CRM 12.0
SHOP 20.5
Efficiency of Capital (higher is better) how much revenue the company generates
from its capital.
Ethan, this measure is typically used pre-IPO. Unlike your calculation which is
based on the current book value of equity and debt, it’s usually based on the cumulative
equity and debt raised since founding. Once a company reaches over $100 million in
sales, this measure loses much of its usefulness because the company is funding
from revenues. Just look at SHOP and see how much of their investment since IPO
they’ve actually used and what they’ve used it for. You might be surprised.
Operating Leverage efficiency
How did you calculate this?
Thanks,
Ears
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Hi Ears, Thanks so much for you post. I really appreciate you weighing in and teaching. As with so many things, especially when trying to teach oneself I find I learn more when I have something wrong. I’ll quickly reply and then must rush off to work. Hopefully more later as this is great!
Ethan, this measure is typically used pre-IPO. Unlike your calculation which is
based on the current book value of equity and debt, it’s usually based on the cumulative
equity and debt raised since founding. Once a company reaches over $100 million in
sales, this measure loses much of its usefulness because the company is funding
from revenues
Thank you, this makes a ton of sense. I like the idea of an efficiency of capital score but I can see how one would need to incorporate revenue. I’ll have to do some more thinking/looking to see if I can find something better.
<>iOperating Leverage efficiency
How did you calculate this?
The efficiency part was a copy and paste typo as I was doing some formatting and I didn’t catch the typo. That should have read just been operating leverage. I got both companies operating leverage from slide decks.
https://www.slideshare.net/shopifyInvestors/shopify-q1-2017-…
I can’t find the shopify slide deck at the moment.
I don’t want to imply that SHOP and CRM are the same company however it looks like CRM’s revenue growth slowed down faster than SHOPs but was still pretty impressive. Keep in mind the years I’m listing are through the great recession.
CRM
2008 750 million, 50%
2009 1.01 Billion 44%
2010 1.3 Billion 21%
Honestly, CRM killed it during the recession. I’ll be very curious to see how SHOP handles their growth at a similar size.
best,
EThan
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Ethan,
Some links you might find useful as you sort through this. These are
aimed primarily at entrepreneurs and the VC crowd, but will give you
a general idea of what the industry thinks is important to measure.
http://rccf.com/wp-content/uploads/2017/08/River-Cities-SaaS…
https://www.forentrepreneurs.com/saas-metrics-2/
https://www.forentrepreneurs.com/2016-saas-survey-part-1/
https://www.forentrepreneurs.com/2016-saas-survey-part-2/
Thanks,
Ears
7 Likes
Ethan,
I just wanted to say I thought this was really good. I think you’re right that SHOP may be even more of a rocket ship, but Salesforce has been a very special company.
I will say that I am a bit more simplistic when it comes to what to measure. I don’t try to figure out efficiency, return on capital, etc. I got a degree in finance. At one point I could have told you how to calculate all that stuff. What I do now is simply look at the financial statements each quarter and try to get the whole picture. It takes a little more time, but it’s more fun. And it helps your understanding of the company.
If I had to pick a metric, it would be what I’ve harped on lately – I like to see operating profit increasing faster than operating expenses. That, and improving gross margin, and I’m really happy. Throw in some rapid and maybe even accelerating growth, and I’m over the moon.
I also really loved what you had to say here: Personally I think we are in a generational switch to SaaS services. I think we are seeing these higher multiples because the business cycle is good, companies have money to spend and that our board had benefited from being in the right place at the right time as the EV/S of the entire SaaS sector have expanded. I think the business cycle will continue to be good until it isn’t… and then we will have contracting EV/S and probably some slower growth. When this happens is anyones best guess. However, I do like that our quickly growing companies still have plausible scenarios that we can make a lot of money (nothing like we have in the past 18 months) over the next 5 years.
I think I agree with all of that. Maybe it isn’t just amazing until it’s over – maybe it continues in fits and starts. But I like where we’re at. I still see value. Regarding the fact that the companies are still growing quickly – also, some are still very affordable, so to speak. Wix is a $4B company. Hubspot too. Same with New Relic and Okta. Alteryx is a $2B company, and Talend, Hortonworks, and Instructure are even smaller. Lots of room to grow, and in many cases, even for multiples to expand!
Then there are SHOP and SQ at 16B and over 22B respectively. I like how you noted that Salesforce is closing in on being a $100B company. I don’t see that for New Relic or Hubspot or Alteryx…but Shopify and Square? Who knows.
Anyway, good stuff, and thanks.
Bear
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