Why Merrill Lynch Added Salesforce.com to the Prized US 1 List

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Salesforce.com Inc. (NYSE: CRM) is known as one of the best growth stories of the modern era, but it is somewhat of a hard read. The stock has an incredibly high multiple that earnings have never caught up too, although this also speaks to the growth story. Looking ahead, one key analyst sees an incredibly positive future for Salesforce, and the firm updated its view on the stock.

Merrill Lynch added Salesforce shares to its US 1 List, which represents the best investment ideas of the firm. Salesforce continues to be an innovation engine and maintains 20% or more revenue growth rate while showing margin leverage.

Not too long ago this analyst even opined that Salesforce shares could rise as much as 200% by 2020.

In Merrill Lynch’s view, investors do not fully appreciate Salesforce’s long-term margin (OM) leverage. OM leverage shined in fiscal 2017, finishing up with 230 basis points plus OM (excluding foreign exchange and acquisitions) and tracking for a similar magnitude in fiscal 2018. The upside case of its long-term financial model analysis suggests fiscal 2021 revenues could reach about $20 billion and 30% OM if net new subscription revenue grow at a 15% compound annual growth rate from 2016 to 2020 estimates.

Cash flow growth outpaces revenue growth. Operational cash flow growth was 34% in fiscal 2017 and exceeded revenue growth of 26%, well ahead of original guidance of 23%. Free cash flow growth of 28% in fiscal 2017 is outpacing revenues and seems set to outpace again in fiscal 2018, with upside case about $3 per share.

The brokerage firm commented in its report:

Our total addressable market (TAM) analysis suggests that at CY2016/FY17 revenues, Salesforce had around 13% of TAM market share, potentially indicative of strong top line growth for some years. Short-term deferred revenues as percentage of next twelve months (NTM) revenues supports an increasing trend and our case for continued upside to FY18 revenue estimate of $10.18 billion. As we have pointed out, billings are becoming more seasonally weighted with stronger Q4’s and weaker Q1’s, while acknowledging that the surprisingly strong billings growth of 31% in Q1 FY17A sets up tough comparisons for Q1FY18E.

Shares of Salesforce were last seen up 0.7% at $82.87 on Tuesday, with a consensus analyst price target of $96.00 and a 52-week trading range of $66.43 to $84.48.