When it comes to the cloud and corporate intranets and apps, one of the greatest growth stories of the modern era is Salesforce.com Inc. (NYSE: CRM). Its stock has perplexed many investors because of how high the earnings multiple is, but so far in 2016 its shares have underperformed the market as its stock is down less than 1% this year. Now we have one analyst calling for almost 30% upside for the next 12 months. What really stands out is that the call also suggests more than 200% gains could be possible by 2020.

Merrill Lynch’s Kash Rangan and Nikolay Beliov have reiterated their Buy rating and their $100 price objective on Salesforce.com. Where the bullishness gets more pronounced was that they called Salesforce.com their favorite large cap growth idea for 2016. They are also maintaining the path to exponential upside out to 2020. The firm is surprised about how the stock has performed, given that it beat earnings expectations and with a strong stock market. Shares of rival Oracle Corp. (NYSE: ORCL) are up over 13% so far in 2016, and the Nasdaq 100 is up 5% (Dow and S&P 500 both up 8%).

One thing that was pointed out was that Salesforce.com’s historical enterprise value to free cash flow versus billings has been 1.4 times on the growth rate. For the past two quarters, that rate has been closer to 1.0 times. The team noted:

We expect the stock to outperform in the second half as Salesforce.com enters seasonally strong second half and DreamForce in October tends to stimulate new business due to new products. Historically in the second quarter, deferred revenue contribution to the billings number is very modest; our billings estimate of $1.85 billion is a bit lower than revenue estimate of $2.02 billion. Small fluctuations in deferred revenue can lead to misleading interpretation. The fourth quarter is the real key where billings have been 70% to 80% higher than revenues, which sets the tone for the following year’s growth rate.

Merrill Lynch believes that the buy-side expectations for 18% billings growth is beatable. The analysts are modeling 15% reported billings growth but gave the case for as much as 23% annual growth in billings. Five issues were pointed out for upside potential to billings:

1) Delayed three nine-figure deals invoicing;
2) attrition improvement;
3) improved upsell in the install base;
4) modest new business versus the firm’s estimates;
5) 10-20% higher pricing tailwind in sales/service.

Another issue to consider here is that the company Demandware Inc. (NYSE: DWRE) is expected to provide upside to billings, but Salesforce.com is likely to provide the breakout on organic versus acquired billings. Demandware is dilutive in the near-term but will lead to a larger total addressable market. The acquisition prospects were laid out at the start of June.

What matters the most is not just the $100 price objective. Rangan and Beliov talked up a “significant blue sky potential in 2020.” The firm’s $100 formal price objective for the next 12 months is based on 5.8 times expected 2018 enterprise value over revenues. Its report on the cloud wars back in April outlined how Salesforce.com shares could rise to as high as a range of $224.00 to $264.00 in calendar year 2020. At that time, Merrill Lynch noted how $20 billion in revenues is realistic (versus $6.67 billion in 2016):

Getting to $20 billion with current total addressable market does not require “stretching” of market share assumptions. … Our total addressable market does not include what could be $1 billion-plus business from partners (AppExchange etc.). … Our proprietary margin leverage analysis confirms that in steady state, Salesforce can get to mid-30-percents operating margins … we think it is realistic that Salesforce could get to $20 billion in revenues in 7 years, implying multi-year upside.

Merrill Lynch’s investment thesis talks the company up handily as a market share winner. It sees inflecting margins, and the move to the cloud and new opportunities. Five more points, with some overlaps above, were listed as follows:

1) broader distribution – 50% of Global 500 that are not customers can be targeted;
2) lower attrition as enterprise ramps;
3) steady improvement of the average annual attrition to add-on/upgrade sales.
4) verticalization of the sales force to get deeper penetration.
5) broadening addressable market into analytics, verticals, IoT.

With such an exponential stock rise being laid out in the years ahead, 24/7 Wall St. would remind readers that this stock has been very hard for many investors to endorse because of high valuations. Even with shares under $80, that is a valuation of more than 80-times expected 2017 earnings per share — and a $200 share price in the years ahead would still be close to 100-times earnings in 2020.

One last caveat here is that Salesforce.com has one of the larger differences between its GAAP and non-GAAP (operating) earnings per share. That is because of more than $500 million in non-operating expenses from stock options and other non-operating items.

Shares of Salesforce.com were last seen trading up 1.3% at $78.83 on Thursday. The stock’s 52-week range is $52.60 to $84.48, and its consensus analyst price target is $96.74. Salesforce.com has a market cap of more than $53 billion.

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