Why I’m buying more Salesforce shares after a post-Slack takeout

The rumor that salesforce.com (NYSE: CRM) was in talks to buy remote work honey Soft (NYSE: WORK) is now official news, and it has been met with a fair amount of market skepticism. Salesforce shares were down 10% the day after the simultaneous update of third quarter results and the announcement of the Slack acquisition.

Just like I have been doing for years, I will use the skepticism of other investors to strengthen my position in the cloud-based customer relationship management company.

Building an operating system for the future

Salesforce’s acquisition strategy is well known, but some investors are not fans. The last few years, in particular, have seen big, successful deals (MuleSoft, Tableau, now Slack) punctuated with smaller ones along the way. These are typically paid for by a combination of cash and issuance of new shares, the first a drag on profitability and the second an event that dilutes ownership for existing shareholders. It’s not for everyone, but Salesforce’s heavy spend strategy has nonetheless been very effective in easily outperforming new stock creation with even faster profit growth.

However, it has been clear for years (at least in my mind) that the software company’s real goal has not been to maximize profits, but rather to transform itself from a niche cloud service into a the primary software platform of choice powering the entire enterprise. modern infrastructure and operational needs. The addition of Slack now defines it more clearly. The reconciliation, which is expected to be completed in the second quarter of next year, is described by Salesforce CEO Marc Benioff and the company as creating “the operating system for the new way of working.”

This phrase “operating system” is the key. Salesforce has built an incredibly popular ecosystem of applications ranging from customer to commerce to data management, and recent acquisitions have focused on making it easier for Salesforce users to integrate and understand all data. disparities they have. But to continue its progression as a full-fledged technology platform, a core business operations suite is crucial if it is to catch up with the likes of Microsoft (NASDAQ: MSFT). Slack will become the backbone of said operating system and help connect users and data in the new world of remote working that has suddenly come true.

But the question now is whether the price is worth it. Salesforce will shell out $ 26.79 in cash and 0.0776 of its own shares per Slack share – valuing Slack at nearly $ 28 billion at the time of the announcement. This will be Salesforce’s biggest takeover yet, and a significant bonus for a company that has only made $ 834 million in sales in the past 12 months (although Slack has seen growth of 39% year-to-year during its last trimester).

However, as is always the case with Benioff and his team, it is not the individual part that is important, it is the way in which it transforms the existing services globally. And Slack’s work to go beyond an internal communication and collaboration tool to become a tool that also extends to communicating and collaborating with an organization’s suppliers and customers fits the vision. of Salesforce.

Transform successful purchases into breakthrough services

There is reason to believe it will work. Benioff was successful in bringing acquisitions into Salesforce and turning them into something much greater than the sum of their parts. Take the Commerce and Marketing Cloud segments, started a few years ago (mainly with Demandware in 2016, bought for $ 2.8 billion). Benioff said in the latest 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, the digital data integration services launched by MuleSoft (acquired in 2018 for $ 6.5 billion) and Tableau (acquired in 2019 for $ 15.7 billion), also continues to grow at a rapid pace. and fuels the digital transformation of businesses by facilitating insight gains in data and creating new applications. All of these segments complement the ever-expanding sales and customer service relationship where Salesforce began.

Data source: Salesforce. YOY = year after year.

Put simply, I like the chances of Salesforce doing it again with Slack, using a small growing software company to increase its own trajectory and prepare for future expansion. Management has provided an early outlook for next year, in which it sees revenue rise 21% to $ 25.5 billion (compared to expected growth of 23% to $ 21.1 billion this year). Sure, Slack will be a big help, but the first forecast for the fourth quarter of this year and the first quarter of next year calling for 17% year-over-year growth for each period, excluding Slack, show that Salesforce has organic dynamics on its side. as well.

Benioff later started talking about how Slack and the new “Future of Work Operating System” laid the groundwork for his business to eventually reach $ 50 billion per year in revenue. Getting there will undoubtedly involve more big acquisitions. But I like the worry that is currently pushing stocks down. If history repeats itself, the market will worry about the cost of purchase and the stock will tumble, only to reverse course when Salesforce reports an “acceleration” in growth due to the said acquisition. So I buy, but focus on price in the long run, as the company aspires to eventually become one of the biggest tech companies in the world.