Company: Salesforce (CRM)
Business: Foreclosure is a global leader in customer relationship management (CRM) technology that connects businesses and their customers. Founded in 1999, it is a pioneer in cloud software. It started as a tool to help sales teams increase their productivity while improving the end customer experience. Over the past 20 years, they’ve expanded into other areas to help businesses connect with customers and better serve them, including Sales Cloud, Marketing & Commerce Cloud, Platform & Other, Integration Cloud, Analytics Cloud, and Service Cloud .
market value: $160.1 billion ($160.17 per share)
Activist: Starboard value
Percentage ownership: n / A
Average cost: n / A
Activist Comment: Starboard is a highly successful activist investor and has extensive experience helping companies focus on operational efficiencies and margin improvement. Starboard can also look back on a successful track record in the field of information technology. In 48 previous engagements, it has returned 34.33% versus 13.75% for the S&P 500 over the same period.
On October 18, Starboard Value announced that it had taken a position at Salesforce.
Starboard views Salesforce as a high quality and stable company at an attractive valuation with the potential to add significant value through a better balance of growth and profitability. Salesforce’s vision and market leadership have enabled the company to grow revenue at a compound annual growth rate of approximately 38% over the past 20+ years. It is the market leader in several large and fast-growing markets (#1 or #2 market share in seven markets with growth rates ranging from 8.5% to 18.7%). Despite this, they have underperformed their peers, the technology sector and the broader market over the past three years, and are trading well below their peer median multiples for expected earnings (3.8x vs. 6.7x for peers) and free cash flow expectations (18 .7x versus 6.7x) rated 22x for peers).
This valuation discount is largely due to the below-average mix of growth and profitability. Salesforce’s competitors operate on a “rule of 50” – the average revenue growth plus adjusted operating margin of competitors is 49.4. Salesforce currently has a revenue growth rate of 17.0% and an operating margin of 20.4% for an overall margin of 37.4%. Starboard has extensive experience with growth companies that are beginning to experience slower growth rates and need to either regain that growth and/or focus on margins.
The good news here is that Salesforce has a renewed management team focused on improving the company’s growth and profitability. Brian Millham was appointed President and Chief Operating Officer in August 2022. Bret Taylor was named co-CEO in November 2021 and Amy Weaver was named president and chief financial officer in February 2021. At their September 2022 Investor Day, Salesforce announced new revenue goals, a commitment to driving profitable growth, and opportunities for operating margin and free cash flow. On that investor day, they also formulated their first concrete margin target in history: 25%. Just before Investor Day, during August’s second-quarter earnings report, Salesforce announced its first-ever stock buyback program. However, this margin target is below its peers. Even if they achieved that goal, it would only put them at a growth rate + margin of 42. Starboard believes they can do better and we agree, especially with Starboard’s help.
Another way to add value is through capital allocation. Through fiscal 2026, Salesforce will have an additional $20 billion to $25 billion in cash on top of the $10 billion stock repurchase program to be used either for value-added mergers and acquisitions or for further capital returns. Starboard has extensive experience helping companies optimize growth, margins and capital allocation, typically at the board level. Often the best form of activism is when a good activist joins the board of a good company and works with management to improve operations and the bottom line. It doesn’t require more than a director or two and we think that would be best for shareholders here. At a minimum, Starboard will be an active shareholder in this investment.
Interestingly, on Oct. 18, Inclusive Capital also announced a 1 million share (0.1%) stake in Salesforce. Inclusive noted that they are interested in the stakeholder model in the company and expressed their belief that Salesforce is very customer-centric – they create loyal customers because they train them on how to use different tools, increase and improve human capital. Inclusive is an impact investor and pointed out that the company recently announced a new product called Salesforce Net Zero Cloud, an emissions tracking and carbon metering tool that helps companies manage sustainability data. This product was launched in partnership with Arcadia, a technology company providing access to data focused on tackling the climate crisis. Inclusive noted that while it is certainly not in a group with Starboard, it is consistent with Starboard’s financial analysis and path to profitability.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and he is the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist assets. Squire is also the creator of the AESG™ investment category, an activist investment style focused on improving portfolio companies’ ESG practices.