Salesforce: May The Force Be With You

Cloud computing original has been on a tear since inception:

However Investors have been divided on the stock.

Joel Greenblatt has shorted CRM using traditional value metrics, While Soros disciple Stan Druckenmiller has gone long on promises of growth...

So what's the story?

If You Understand It, It's Not Innovation

What the Hell is Cloud Computing? - Larry Ellison

For our purposes, "Cloud Computing" just means accessing software over the internet; your data exists on someone else's computer. That's it.

Why is this important?

Because it is a phenomenal business model: no physical product to ship, one set of code to maintain, no hardware compatibility issues, and because of Moore's law, the software actually gets cheaper to administer over time - witness the 75% gross margin.

If Steve Jobs & Larry Ellison Had a Baby…

It doesn't make sense to hire smart people and then tell them what to do; we hire smart people so they can tell us what to do - Steve Jobs

Salesforce CEO Marc Benioff is a Silicon Valley purebred, growing up in San Mateo and founding his first software company at 15.

He even spent time writing code for the SV godfather himself, Steve Jobs.

Benioff credits Jobs with supplying much of the Salesforce vision, culture, business strategy, and even the idea for an App Exchange.

But there is no one Marc learned more from than Larry Ellison.

Original G

"Most software comes in two flavours: it either doesn't work or it's not useful" - Alex Karp, Palantir CEO

For all the talk of innovation in the tech sector, most enterprise software is terrible.

Larry Ellison is not worth $60 billion because his version of the RDBMS is the best - Oracle caught the database wave, developed a product that was good enough, then put the pedal to the metal with aggressive sales and marketing practices.

One of the original Oracle Ads

So aggressive in fact, that Oracle almost went belly up in 1990. (Believe it or not, Oracle had a campaign where reps were literally paid in gold)

In the quest for growth, Larry's troops mortgaged the future by pressuring customers to sign contracts for software years in advance.

Oracle booked the revenue up front, the sales reps made out like bandits, and when the money never showed up, shareholders sued and Ellison cut 10% of his workforce.

The Pen is Mightier

"The first thing we do, let's kill all the lawyers" - Dick the Butcher

Mr. Ellison atoned for his sins and began to engage in what could be called "legal engineering."

I'm not sure if anyone here has done business with the big enterprise software companies, but they are every bit as ruthless as the banks. The org chart looks something like this:

They effectively combine complex computer science and verbose legalese to obfuscate customer contracts.

There are very few people with both the IQ & education to truly understand these papers, and most of them are working for the big software providers.

Big tech will discount the up-front payments on their software, knowing that long-term the contract gotchas will more than make up for any short term concessions.

So when it looks like Oracle is going to miss a quarter, a "data audit" is performed and customers are treated to a nasty surprise.

The message looks something like this:

"Hi Mr. Customer,

I hope you're having an AMAZING day!

We conducted a data audit and found that you are over your transaction limit. Oh no! :(

Based on my math, you owe us 100 million dollars. You've got 3 options:

  1. Pay.

  2. Don't pay, we sue, and you'll spend 200 million over the next 10 years in court.

  3. Purchase this new software module for $10 million, effectively locking you into our platform for the next 10 years!

Net 30.

Thanks! :)


A Challenger Appears

The sequel is better than the original

After spending nearly 2 decades as one of Ellison's most trusted lieutenants, Marc broke out on his own and went to work building the next generation silicon valley icon:

To get here, Benioff applied the principles of Steve & Larry.

The Student Becomes the Master

Marc is related to Game of Thrones showrunner David Benioff - it shows.

Marc worked with accounting standards boards from the beginning to allow for the deferred recognition of sales commissions, proactively addressing one of the issues that almost destroyed his mentor.

And Jobs' fingerprints can be seen on both the Salesforce marketing videos and keynote speeches, and (in my opinion anyways) SFDC does it better with a more personal, interactive feel:

Once more: Mr. Benioff combined the cult-like marketing of Jobs with the hardline business tactics of Ellison, and then added a clever twist of his own...

What Dreams are Made of

"There are three ways to make money. You can inherit it. You can marry it. You can steal it." - conventional wisdom in Italy

In the good ol' days of on-premise software - when the application was actually run on site - your provider could employ data audit pressure tactics, hit you with a lawsuit, and then wait for the case to work its way through court…

But there wasn't a whole lot they could do to actually stop you from using the application.

The cloud changed everything. Customers were sold a dream...:

  • Automatic upgrades
  • Subscription model, no more lock-in!
  • Less expensive!

...and delivered a nightmare:

  • Upgrades can break custom modifications
  • Lock-in is actually worse
  • Software costs less upfront, but way more over time

But the worst part? Customers have no real control - If you get into a dispute with Salesforce, they simply turn off your software.

Try collecting on accounts receivable when you don't know the phone number or e-mail address of any clients.

Benioff has even taken things one step further, using Salesforce as his soapbox to - ostensibly (more on this soon) - address larger social issues.

Mr. #MeToo
All warfare is based on deception - Sun Tzu

No matter what you think of the ongoing gender battle, one thing is clear: the public can't get enough.

The CEO as politician narrative is in full effect, and Benioff has been a master of exploiting popular culture. Marc has addressed:

  • Women in tech
  • Transgender bathrooms legislation
  • K-12 Schools
  • Philanthropy

There is tremendous value in playing to the crowd, and the cuddly public image, the cozying up to left wing leaders, the 1/1/1 model, the hospital donations... all provide cloud cover (see what I did there?) for the most ruthless monopoly this side of Facebook.

The New New Thing

"Almost all successful companies in Silicon Valley had some model of starting with small markets and expanding." - Peter Thiel

Please excuse the following acronyms and tech lingo:

Salesforce began as a Software-as-a-Service (SaaS) company, with a sole focus on Customer Relationship Management (CRM).

Over time, Salesforce evolved from this "paradigm" into a Platform-as-a-Service company (PaaS) - essentially acting as an Apple iOS/Microsoft Windows for business applications.

This was a brilliant business decision.

Salesforce is now the operating system for an organization's every customer interaction, and startups entering adjacent industries are encouraged to build on (and forced to integrate with) Salesforce - witness Veeva Systems, a $10 billion (!) life sciences specific CRM built on the SFDC platform

This widens the Salesforce moat - potential competitors are discouraged from building up small monopolies in related busineses, and then leveraging them to attack Salesforce itself.

Better still, as strategically important applications from different vendors duke it out on the platform, SFDC gets to watch from the sidelines (while getting paid!), and then simply subsumes the best of breed.

Again, a brilliant business decision.

King of the Castle

But all the time, if you've got a wonderful castle, there are people out there who are going to try and attack it, and take it away from you. And I want a castle that I can understand, but I want a castle with a moat around it - Warren Buffett

Extending beyond the Salesforce ecosystem, Benioff acquired Mulesoft which was, in my opinion, the most important acquisition made by any enterprise software company in the past decade.

As software continues to "eat the world," the number of software providers increases in lockstep - the typical enterprise uses applications from over 1000 different software vendors; it's simply no longer possible to be the single, vertically integrated software solution provider for every business need.

With the Mulesoft acquisition, Salesforce now dictates how software providers "talk" to one another - the strategic advantage this provides cannot be overstated.

Salesforce now controls the flow of information within a company, the equivalent of controlling oxygen within a human being.

Above the Cloud

I think moats are lame… they're like nice in a sort of quaint, vestigial way. But if your only defense against invading armies is a moat, you will not last long. What matters is the pace of innovation. - Elon Musk

One of the most important competitive advantages Salesforce has is clean, structured data that customers enter themselves.

Benioff has built a dynamite machine learning/artificial intelligence team to take advantage of this phenomenon: whenever a user performs an action on the Salesforce system, Salesforce as a whole gets smarter - customers literally pay to make Salesforce more valuable.

To me, Salesforce looks like a classic Phil Fisher growth stock; it meets all of the criteria laid out in Common Stocks and Uncommon Profits.

Given the price of the stock, I think the most important questions are: can Salesforce continue to grow at a rapid clip for the next 5-10 years, and can management cut costs when growth slows?

CRM as a market is expected to grow to $82 billion by 2025.

Salesforce currently owns 20% of this market - increasing this number steadily year over year - and has been aggressively expanding into other lucrative sectors (customer service, marketing, ecommerce, etc.). Continued growth seems likely.

At ~50% of revenue, the company's single largest expense is sales and marketing. As I mentioned before, vendor lock-in is tremendous, so sales efforts are really only required for net new business, not maintenance.

Observing Oracles growth trajectory vs. sales and marketing spend, you'll see the same 50% of revenue cost during rapid growth followed by a rapid decline to a steady 20% when things slowed down. It's highly likely that SFDC will follow a similar trajectory.

If you have a longish time horizon, and can stomach the volatility, I think CRM is a great buy.



Comments (38)

Jul 11, 2018 - 3:26am
WidespreadPanic90, what's your opinion? Comment below:

Good stuff, thanks for this.

"That was basically college for me, just ya know, fuckin' tourin' with Widespread Panic over the USA."

Most Helpful
Jul 11, 2018 - 8:18am
thebrofessor, what's your opinion? Comment below:

good write up.

what's your background? are you ER? AM? student?

the only comment I'll make is that I'm no expert at shorting but it seems foolhardy to me to short something like this, you have to be right twice: you have to be right that it's going down, and you have to be right soon so that you don't get bled dry waiting for your thesis to come true. while the shorts may be right eventually (all stocks eventually lose 20%+), doesn't mean it will be a good trade. perhaps he's under the assumption (a correct one, I'd point out) that trees can't grow to the sky and the lofty valuations can't persist in perpetuity (you can't grow at 30% per year forever, but since they're a $100bn company and not AMZN, they still could have lots of room to run.

if you're a student and have some time to do more of these, I'd be curious about some turnaround stories: GE, PG, WMT, as well as some other ones of interest: V/MA (how long can these guys go on a tear? I think for a while as the world moves electronic, but I'm biased because I own them), QCOM, AAPL (how valuable should the #1 smartphone company be? can it be $1tn?), and finally: FB (for obvious reasons).

thanks again brah

Jul 11, 2018 - 1:06pm
CuriousCharacter, what's your opinion? Comment below:

Re: Qualcomm - I'm not smart enough to evaluate semiconductor manufacturers.

The business is cyclical, ungodly expensive, and if a fabrication cycle is missed shareholders pay through the nose.

Beyond that, there has been something of a renaissance in chip design: CPUs, GPUs, TPUs, FPGAs, ASICs, Quantum... an entire alphabet soup of "new paradigms." How do you predict what producer of which architecture will succeed?

I could spot the Nvidia spike, but only because I was close enough to the gaming, crypto and machine learning communities to see the rapid growth in hype; I have no idea how sustainable their advantage is.

I really think you need to be a device physicist with industry experience to understand where the value will accrue in the hardware chain.

  • 4
Jul 15, 2018 - 12:17am
NineONine, what's your opinion? Comment below:

IMO, whereas Nvidia has a solid, and I mean SOLID hold on the gaming GPUs market, their grip on the crypto mining market seems to be slipping, especially as ASIC chips are becoming more and more widespread on the mining scene. If you look at some of the newer mining rigs, many of them will utilize ASIC chips in the place of traditional GPUs because, as their name suggests, they are application specific and therefore better optimized for such, making them faster and more power efficient (which is arguably the biggest cost to consider when mining). With that all being said, Nvidia has been solidly expanding their lineup of GPUs and graphical accelerators targetted towards machine and deep learning type uses. If you look at a list of the fastest computers in the world, you'll note that many of them utilize hundreds, if not thousands of Nvidia GPUs, and they are becoming popular even for smaller scaled deep learning tasks. Also, to refer back to my point regarding a solid grasp on the gaming GPU market, the market for gaming GPUs seems to be closely correlated with the release of good/popular PC games, which would obviously drive up the market for GPUs. With the increase in popularity of Twitch streaming and ESports, I think there will be growth here. If you peep their financial reports, you'll see that the primary portion of their revenue is still dominated by the gaming GPU market, so I think that its still fair to keep NVDA in the books for now.

Made ya look
  • 3
Jul 11, 2018 - 10:11am
UTDFinanceGuy, what's your opinion? Comment below:

Great post. I've always loved Ellison simply because of the push on the sales and marketing side. Oracle was one of the first companies that came out as having one of the best comp plans for sales people. Mind you, competitive as hell, very cut throat, but it wasn't (possibly still isn't) unheard of to make over $500K-$700K a year as a top performer. The CRM market is weird though. I view it very similarly to Social Media as a general market. We're seeing stuff come through which is pretty amazing with the new sales enablement and integrations between various platforms. I know a lot of organizations that practically utilize a series of sales enablement tools, integrated into existing systems (Microsoft Outlook, etc) and they're just a reliable as using a CRM -- but much more agile.

"It is better to have a friendship based on business, than a business based on friendship." - Rockefeller. "Live fast, die hard. Leave a good looking body." - Navy SEAL
  • 4
Jul 11, 2018 - 1:14pm
CuriousCharacter, what's your opinion? Comment below:
Great post. I've always loved Ellison simply because of the push on the sales and marketing side. Oracle was one of the first companies that came out as having one of the best comp plans for sales people. Mind you, competitive as hell, very cut throat, but it wasn't (possibly still isn't) unheard of to make over $500K-$700K a year as a top performer. The CRM market is weird though. I view it very similarly to Social Media as a general market. We're seeing stuff come through which is pretty amazing with the new sales enablement and integrations between various platforms. I know a lot of organizations that practically utilize a series of sales enablement tools, integrated into existing systems (Microsoft Outlook, etc) and they're just a reliable as using a CRM -- but much more agile.

Oracle is known for rewarding top sales reps handsomely, however the company is every bit as litigious with troops as it is with the enemy...

  • 3
Jul 11, 2018 - 3:13pm
CuriousCharacter, what's your opinion? Comment below:

For whatever reason, whenever another cloud provider misses guidance, the market predicts End of Days and Salesforce stock tanks. That's when I buy.

Workday follows a similar pattern, and they are absolutely crushing the legacy vendors in their space (SAP and Oracle). Long term, WDAY is a strategic acquisition for Salesforce so there's your catastrophe risk protection.

  • 2
Jul 14, 2018 - 6:46pm
CuriousCharacter, what's your opinion? Comment below:

Re: Hubspot - Hubspot is primarily an inbound marketing tool, which integrates with Salesforce; the CRM piece is basically a free add-on.

As far as rip & replace Salesforce... at the bottom end of the market, maybe. But at SFDC's scale, they are beginning to leave the bottom 10% of the market behind anyways.

Software companies do not have to constantly innovate and be better than competitors, if they did Oracle, SAP, and Microsoft would have been out of business 15 years ago.

Salesforce has a ridiculous amount of leverage over customers.

  • 1
Jul 14, 2018 - 8:47pm
Pio nono, what's your opinion? Comment below:

Salesforce is a piece of shit company with a piece of shit product. The only reason they sell anything is because procurement of that shit in corporate America are by and large morons, and they still can't make money .

Jul 14, 2018 - 9:55pm
ctrl-z, what's your opinion? Comment below:

I know most of us on here on WSO are in finance or trying to break in, but what do you guys think about the potential for entry level sales at an enterprise b2b company like sales force? (IBM,oracle)?

I've heard the base is around $60k out of undergrad with no ceilings for sales commissions.

Thoughts on this career path as compared to iBanking then PE?

Jul 15, 2018 - 8:57pm
accountingbyday, what's your opinion? Comment below: (Originally Posted: 04/28/2011)

Does anyone have insight on

I think the story is interesting, but how does it turn an EBIT of $129M into an $18B market cap? I was reading an article the other day that said they don't have a wide enough platform to really wipe out any competitors. Combine that with lack of growth opportunities and the high cost it pays for its sales, I just don't see it.

I definitely don't know enough to dare shorting this thing, but I'm really curious about it.

Any of you long?

Anyone with the balls to short?

twitter: @CorpFin_Guy
  • 2
Jul 15, 2018 - 9:00pm
thor1000, what's your opinion? Comment below:

Use options... I think there is no way they are going to keep their stock price so high in the medium term.

And look at it longterm. They are offering somehing new, but they have NO sustainable competetive advantages. Everybody will be able to develop their tech, business model and they have nothing to keep their customers from switching.

If you're just trading then have fun with it long/short, its just bad as an investment (right now)

Jul 15, 2018 - 12:32am
NineONine, what's your opinion? Comment below:

Very excellent article about Salesforce, and a great overview of the Enterprise Software market as a whole. I was reading about SAP just earlier today, and SAP's CEO, Bill McDermott, predicts that SAP's cloud ERP's revenue growth rate would be in the range of 30%! every year. Do you see this as realistically possible? 30% seems like a lot to me, especially considering how, as far as I can tell, larger companies still favor on-site ERP services as opposed to on the cloud (partially for some of the reasons you have mentioned above, and that they have already expended plenty of capital getting such a system set up, so why leave it when it works just fine). Of course, however, SAP and Salesforce have two pretty different approaches to the market. Whereas Salesforce has roughly stayed within the market of CRM, SAP has flourished in ERP and HCM as well. Clearly, however, remaining within the confines of CRM has worked out just fine for Salesforce as of yet. What is your take on this situation? How do you see SAP' matching up against Salesforce? Thanks in advance.

Made ya look
  • 3
Jul 15, 2018 - 3:38pm
CuriousCharacter, what's your opinion? Comment below:

SAP's cloud specific ERP revenue growth might touch 30% per year, but they are starting from a very small base... SAP was a decade late to the cloud party.

I'm not a big fan of Bill McDermott, and I think Benioff did an amazing job of goading SAP into a war they can't win -

  • 1
Jul 15, 2018 - 2:41am
wso23, what's your opinion? Comment below:

So I will offer a bit of caution on Benioff while admitting to not having done a deep dive, so take it with a grain of salt but whatever.

This guy strikes me as an empire builder with a healthy dash of hubris. You praise the Mulesoft deal but I spoke to an insider who thought it was relatively reckless.

Owning CRM is trusting in Benioff's aggressive tendencies. I think that you acknowledge this so all good.

Jul 15, 2018 - 3:02pm
CuriousCharacter, what's your opinion? Comment below:

Dude spent 17 years apprenticing for Larry Ellison (favorite book: The Robber Barons), Benioff is 100% an empire builder.

You won't get the same kind of clean capital allocation as, say, John Malone or Henry Singleton, but there is lots of money in empires...

Jan 23, 2020 - 1:45pm
m_1, what's your opinion? Comment below:

I am really curious to see what happens with SalesForce...

This might only apply to the eCommerce side of things but their products for the most part do not have a good reputation as they're pretty bloated. That's first-hand experience and something I've heard from their own engineers...likely a result of all the acquisitions and then just "stringing" them together with some quick and dirty code. Very familiar with their eCommerce offerings specifically including the core platform offering and was really unimpressed compared to what else is out there at the enterprise level... Also drives me nuts how they charge for every little feature when other SaaS providers will include it.

The one nice thing though is that they do really offer EVERYTHING in one place. But the components themselves are weak/slow/dated. I'm hoping they just take the time to rebuild products from the ground up with less spaghetti-code shit going on.

The cool thing about offering the kitchen sink though is that all the lazy CMOs will use your product.

Jan 24, 2020 - 10:25am
CuriousCharacter, what's your opinion? Comment below:

I think Salesforce continues to grow steadily for at least the next decade.

You're right that their eCommerce "cloud" is a series of stitched together acquisitions, but that's par for the course in enterprise tech.

It's not just lazy management, it's risk averse management - the phrase "nobody ever got fired for buying IBM" now applies to Salesforce.

At the enterprise level, lots of organizations have to buy from Salesforce, the rules and regs around approved vendors necessitate it.

  • 1
Jan 24, 2020 - 10:59am
m_1, what's your opinion? Comment below:

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Feb 2, 2020 - 9:36am
qwantum70, what's your opinion? Comment below:

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Veritatis reprehenderit neque ex a. Ullam et pariatur assumenda ut harum voluptatem rerum. Non harum ipsum et. Rerum ab quia ratione porro. Veniam et et quidem. Ex et officiis in suscipit rerum pariatur sunt.

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