Though shares of the wide-moat firm have rallied this year, we think they could have more room to run.
By Rodney Nelson | 05-18-17 | 07:50 PM | Email Article

 Salesforce.com  hit the ground running in the first quarter, surpassing our revenue expectations as the firm continues to see revitalization in its Sales Cloud business. The firm is seeing strong growth in all geographies, but sales in Europe and Asia-Pacific continue to grow at a strong clip. We are maintaining our wide moat and positive moat trend ratings for Salesforce. After incorporating management’s strong guidance and modestly lower long-term tax assumptions, we are raising our fair value estimate to $103 from $99 previously. Although shares have rallied roughly 30% year to date, we believe moderate upside remains.

Rodney Nelson is an equity analyst for Morningstar.

First-quarter revenue rose 25% versus the prior-year period to nearly $2.4 billion, well ahead of our lofty expectations. Sales Cloud remains a bright spot, as revenue rose 14.5% in the first quarter despite a tough comparable period. Revenue from the combined Marketing and Commerce Cloud segment were even more impressive, drastically outpacing our expectations in the quarter. We think this development underscores the necessity of the firm’s recent acquisition of Demandware, which we believe solidifies Salesforce.com’s offering as the broadest and deepest in the customer relationship management market. Commerce Cloud processed more than $4 billion in gross merchandise value in the quarter, up more than 30% versus the prior-year period.

Management elevated its full-year revenue guidance above our estimate (which was ahead of management’s prior guidance), which we believe is a reflection of the firm’s go-to-market strategy of selling a holistic platform as opposed to individual modules. Despite heavy research and development investments in the first quarter, CFO Mark Hawkins still expects adjusted operating margins to expand between 125 and 150 basis points, roughly in line with our forecast.

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