We continue to view Salesforce as one of the best-positioned companies in software, reflected in our wide economic moat rating.
By Rodney Nelson | 11-17-16 | 10:00 PM | Email Article

 Salesforce.com's third-quarter results came in ahead of our expectations as the company delivered on its assertion that U.S. market weakness in the second quarter was a temporary headwind. Management also touted several wins in the quarter that were heavily aided by the Commerce Cloud, a product born out of the recent Demandware acquisition. We continue to view Salesforce as one of the best-positioned companies in software, reflected in our wide economic moat rating. We are lifting our fair value estimate $1 to $99 per share as we account for modestly higher fiscal 2017 expectations, and we think shares continue to look attractive despite a roughly 6% rally on the back of these results.

Rodney Nelson is an equity analyst for Morningstar.

Third-quarter revenue rose 25% versus the prior-year period (27% in constant currency) to $2.1 billion, modestly ahead of our forecast. The firm saw a solid recovery in the Americas after Salesforce experienced execution issues in the second quarter, as third-quarter sales in the region grew 27% year over year. We continue to be encouraged by the consistent reacceleration in growth from Sales Cloud despite it being the firm’s largest revenue contributor, as revenue is tracking toward 12%-13% growth in fiscal 2017 after growing just 10.5% in fiscal 2016. Management also called out the recent Demandware acquisition as an instrumental contributor in the quarter, as Salesforce landed a large deal with a multinational consumer packaged goods company that was largely predicated on the presence of Commerce Cloud. We continue to believe this acquisition will plug one of the few remaining holes in Salesforce’s CRM offering, ultimately leading to more transformational deals, evidenced by a record number of 7-figure deals in the quarter. We are paying close attention to the Marketing and Service Cloud growth rates, as each product faces competition from companies such as Adobe and ServiceNow, but sales growth eclipsed 20% for each product, excluding Demandware.

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