In our previous research on $Salesforce(CRM.US), we primarily explored the recent market focus on Agentforce, discussing its development limitations and potential impact on performance. Simply put, it is undeniable that Agentforce is indeed a direction with broad prospects and potential market space, but due to the short time since its product launch, the certainty and visibility are relatively low, making it more of a "believe it or not" vision and a performance bullish option. Therefore, the pricing of Agentforce may also be likened to options—paying a limited premium to gamble on a low-certainty but high-elasticity return.

After all, the fundamental valuation of Salesforce, aside from the various Agentforce stories and the recent price increases they have brought, still depends on what price one can hold Salesforce without losing money, which is determined by its existing business. Correspondingly, the continued upward elasticity may primarily depend on Agentforce. Thus, in this article, we will return to Salesforce's original core business and explore its actual value.

The following is the main content:

1. What kind of company is Salesforce?

1. Salesforce's business and revenue composition

As a foundation for the analysis that follows, a brief introduction to Salesforce's business and revenue composition is an unavoidable topic. Salesforce, established in 1999, is the earliest, highest-revenue (approximately $38 billion for the fiscal year 2025), and highest market capitalization (currently over $300 billion) native cloud-based enterprise service SaaS leader, with over 90% of its total revenue coming from subscription revenue for various types of SaaS cloud services (Subscription & support revenue).

Additionally, a small single-digit percentage of revenue comes from the consulting and training services (Professional service) required when users adopt products. Historically, this consulting business has barely broken even at the gross profit level, or even incurred negative gross profit. It is evident that Salesforce does not consider this consulting business as a revenue source, but rather as a supplementary "customer service" offering. In other words, nearly 100% of Salesforce's revenue and profit come from subscription revenue for its various SaaS cloud services, which we will focus on in the following sections.

According to the company's own disclosure, its SaaS services are divided into five major segments, launched in chronological order: Sales Cloud, Service Cloud, Platform Cloud, Marketing & Commercial Cloud, and Data & Analytics. For specific sub-products or services under each segment, please refer to the brief introduction in the table below; we will not elaborate on them one by one. It can be clearly seen that

① Although Salesforce initially focused primarily on CRM (client relation management) related software, the two foundational businesses, Sales Cloud and Service Cloud, which were launched first, still contributed about 70% of total revenue in 2016. However, by fiscal year 2024, the revenue contribution from the five major service segments of Salesforce has become quite balanced. Except for the Data & Analytics segment, which was newly independent in 2021 and contributed the lowest at about 16%, the revenue contributions from the other four segments are all around 20% to 25%. Therefore, Salesforce is no longer focused solely on CRM but has become a SaaS service provider with a balanced and diversified business structure where the importance of each segment is "on par."

② In terms of growth rates for each segment, Sales Cloud has maintained a growth rate of only 10%+ from 2016 to the present. As the original core segment of the company, it has essentially lost its growth potential many years ago. In contrast, another veteran business (launched in 2009), Service Cloud, still had a relatively high growth rate of 20% to 30% until 2022, making it the segment with the highest revenue contribution for Salesforce.

③ Including the consistently low-growth Sales Cloud and the other four relatively newer segments that once achieved double-digit growth rates, the growth rates began to decline and converge after fiscal year 2022. By fiscal years 2024 to 2025, the revenue growth rates of all five segments have converged to around 10% (the Data & Analytics segment has a wider fluctuation range, but the trend of significantly slowing growth is consistent). It seems that although Salesforce's business composition has become sufficiently diversified, there are currently no segments with relatively high growth that can drive the overall growth of the company.

2. Acquisitions - The Secret Behind Salesforce's Two Decades of Leadership?

From the simple breakdown of revenue composition above, one of the key reasons Salesforce has stood out and become the most successful company in the SaaS industry is that Salesforce did not limit itself to the early focus on CRM Sales Cloud. Over the past 20 years, it has successfully developed four other business segments that are nearly equivalent in scale to Sales Cloud. Admittedly, behind the diversification choices, there must also be the "inevitable" need to seek new growth engines due to the growth bottleneck faced by the single Sales Cloud business. However, the successful execution of a diversified strategic goal undoubtedly reflects the management's excellent strategic vision and execution capabilities. What is even more difficult is that Salesforce's diversification is a combination of internal incubation and successful external acquisitions.

Here is a brief review of Salesforce's important acquisitions and business expansion history based on the following timeline:

① 1999-2008: At its inception, Salesforce was a company focused on CRM. As one of the earliest promoters of "cloud services," Salesforce initially targeted budget-constrained small and medium-sized enterprises, completing its first wave of rapid growth due to its time-saving and cost-effective characteristics of not requiring local deployment and being easily accessible via the web. This can be seen as a typical and successful strategy of "surrounding the city from the countryside" in the early stages of internet companies reforming traditional industries.

However, with the growth of Salesforce's scale and the upward penetration of its customer base, the demand for service customization from customers also increased. To avoid falling into the "chronic disease" of the traditional software industry, where customers are individually customized leading to non-reusable code and low efficiency, Salesforce began to improve its underlying code and build a PaaS platform after the new millennium. With the launch of the PaaS platform Force.com and the application marketplace AppExchange in 2007, it allowed various developers to create solutions to meet diverse customization needs. On the other hand, the completion of the underlying platform also marked that the technical prerequisites for diversified business expansion had been met, and Salesforce's continuous acquisitions and expansions began.

② 2008-2013: After the underlying PaaS was completed, Salesforce's first focus was on customer service cloud and marketing cloud business directions. It acquired InStranet (a customer service technology provider), Buddy Media (a social media marketing platform), ExactTarget (a leading marketing SaaS provider), and several other related companies, quickly gaining technology and customer resources related to customer service and marketing through acquisitions, leading to the launch of its customer service cloud (Service Cloud) and marketing cloud (Marketing Cloud) businesses in 2009 and 2012, respectively.

③ 2016-2018: With the rise of e-commerce or online sales importance, Salesforce rapidly strengthened its capabilities in e-commerce SaaS by acquiring Demandware (a B2C e-commerce service provider) and CloudCraze (a B2B e-commerce service provider) during these two years. On one hand, it seized the beta of the e-commerce industry, and on the other hand, it was a defensive strategy against competitors like Adobe and Shopify in their advantageous fields.

④ 2018-Present: After the aforementioned rounds of acquisitions, Salesforce has basically completed the construction of several major functional SaaS businesses under the CRM umbrella. Subsequently, Salesforce began to pursue larger-scale acquisitions and expansions. This includes MuleSoft (the largest integration cloud, allowing users to transfer data and interact across different companies' platforms, systems, and applications), Tableau (a leading visual data analysis and business analysis tool), and Slack (the second-largest collaborative office SaaS after Microsoft Teams)

From the business expansion and acquisition history of Salesforce, it can be seen that the company's management has excellent acquisition "insight," helping Salesforce quickly develop new businesses without being "hung up" on the single sales cloud business or relying on "painful methods" to develop new features entirely in-house. From a broader perspective, for any company, once its pillar business reaches maturity, how to successfully achieve business diversification may be one of the key factors determining whether the company can continue to grow over decades. Among the companies covered by Dolphin Investment Research, Alibaba and Broadcom can be seen as two typical contrasting cases. The former has also engaged in extensive business expansion across a wide range, but due to the not particularly successful results of diversification, Alibaba still mainly relies on (and is constrained by) its core domestic e-commerce business. Broadcom, on the other hand, has become one of the top three semiconductor companies, second only to NVIDIA, with a market value exceeding one trillion dollars, through continuous successful acquisitions.

3. Not only can they buy, but they can also integrate

Indeed, whether a company's management possesses excellent acquisition and expansion capabilities is akin to a black box for most investors, making it difficult to verify in advance. However, looking back from a retrospective perspective, Salesforce not only has the ability to rapidly expand through acquisitions, but also, more importantly, the ability to successfully integrate acquired assets and generate synergies. As evidence, this is first reflected in financial metrics; as mentioned earlier, the revenue scale of new segments such as customer service, marketing & e-commerce, and data analytics launched after acquisition integration is roughly comparable to that of the earliest sales cloud segment, indicating that from the perspective of revenue growth, Salesforce's diversification is evidently quite successful.

From the market share perspective, according to Gartner's research, Salesforce not only holds about 29% (the industry leader) market share in its original sales SaaS segment, but also has the industry-leading market share in the other four business segments launched after acquisitions, including customer service, marketing & e-commerce, and platform cloud, while holding the third position in the slightly weaker data analytics segment. In other words, all new business segments launched by Salesforce ten years after its establishment have, without exception, achieved top 1 to 3 positions in the industry.

From the perspective of the acquired assets themselves, the revenue of assets acquired before 2018 has generally increased several times compared to when they were acquired by the fiscal year 2022. Even for Tableau and Slack, which were acquired in 2019 and 2021, their fiscal year 2022 revenue is projected to have increased by 40% to 50% compared to when they were acquired From this perspective, the acquired company has generated significant synergies after integrating into Salesforce's large ecosystem. Salesforce has also leveraged a larger user base, more cross-selling opportunities between businesses, or optimizations in technology and functionality to bring significant revenue growth to the acquired targets.

It can be seen that Salesforce not only excels in mergers and acquisitions but also effectively integrates and enhances the acquired assets, allowing the company's existing business and resources to complement the new assets and new businesses.

II. How does Salesforce perform in the SaaS evaluation system?

Unlike traditional industries, companies in the SaaS industry generally start with valuations of 10x P/S, and under conventional P/E or cash flow valuation systems, SaaS companies are typically valued significantly higher than traditional industry companies, indicating a relatively independent and unique evaluation system and key indicators. Therefore, our next question is, how does Salesforce compare to other SaaS companies under the unique indicator system of the SaaS industry? Does Salesforce have any unique aspects compared to its peers?

1. The Core of the Core - LTV

As shown in the table below, two universal and important indicators in the SaaS industry are LTV and CAC, where: ① LTV, or Customer Lifetime Value: refers to the total revenue a customer brings to the company over the entire lifecycle of their cooperation. It includes not only the initial purchase but also subsequent repeat purchases, cross-selling, upselling, and referral income; ② CAC, or Customer Acquisition Cost: refers to the total cost incurred by a company to acquire a new customer within a specific time frame. This includes all expenses related to marketing, sales, and advertising.

In simpler terms, LTV measures how much revenue a SaaS company can generate from a single customer, while CAC translates into the cost of acquiring a customer. The difference between the two represents the "excess" profit a SaaS company earns from a single customer. Given that the switching costs for SaaS tools are relatively high and they generally adopt a continuous and predictable subscription-based charging model, ideally, a customer can consistently generate perpetual revenue contributions, while the customer acquisition cost is a one-time expense. The generally high gross margins of SaaS companies (70% to 80% is common) mean that when a SaaS company's customer base matures and customer acquisition spending significantly decreases, what remains for the company is a continuous, almost perpetual revenue and cash flow with a relatively high profit margin. This is a relatively common consensus in the market explaining why SaaS companies are generally valued higher Among them, the revenue-generating end - LTV is relatively more important and has greater elasticity. Further breakdown can be divided into:

① Average paid lifecycle of a single customer, which reflects how long, on average, users of the company will continue to pay, whether it is 5 years, 10 years, or 2 years, demonstrating the company's ability to retain users (not being poached);

② Average revenue contribution per customer, which refers to how much revenue the company can obtain from a single user during each payment cycle. This can be further broken down into how many different types and levels of products a single user uses from the company, and what the average pricing of different products is.

For the customer payment lifecycle, the common measurement indicators are customer renewal rate or customer churn rate. A simple mathematical formula is needed: the expected payment lifecycle of users for a company with an average user renewal rate of a is equal to 1 / (1-a). For example, a company with a 90% annual user renewal rate has an expected average total payment period of 10 years. As the user renewal rate increases (and the churn rate decreases), the cumulative total revenue that the company can obtain from the same user will also increase.

In this regard, Salesforce's user churn rate was as high as 20% in 2010, but has gradually decreased and stabilized below 10% in recent years, around 7% to 8%. Although the original reasons for the annual decline in customer churn rate still need to be explored and discussed, the results show that Salesforce's user stickiness is increasing year by year, and the expected payment lifecycle of its users has risen from less than 5 years to about 13 years. In other words, assuming other conditions remain unchanged, this single factor change has increased Salesforce's total lifetime revenue per customer by about 2.7 times.

In horizontal comparison with other SaaS companies, how does Salesforce's user retention rate compare? Since many companies do not officially disclose user retention rates, Dolphin Investment Research used forecast data from a certain overseas investment bank as a reference. According to the bank's forecast, Salesforce's user retention rate of slightly above 90% is not outstanding compared to other SaaS companies and can be considered only at a "qualified" level.

Regarding the average revenue contribution per user, the two driving factors mentioned above are the number of products used and the average pricing of the products. Although the company has not officially disclosed relevant indicators for direct demonstration, according to the company's management disclosure at the FY23 Investor Day: among all its customers, **the number of customers using four or more cloud products only accounts for 20% of the total, However, it contributed about 85% of the annual recurring revenue (ARR). It can be seen that having a rich and complete product matrix, which can form cross-selling and obtain multiple product subscription revenues from a single user, is crucial for SaaS companies. This is also the reason why Dolphin Investment Research has emphasized in the previous text that Salesforce has gradually enriched its product portfolio through successful acquisitions and product integration.

Since the actual majority of the company's revenue comes from a small number of diversified large clients, we believe that the gradual tilt of Salesforce's user structure towards large clients may also be one of the essential reasons behind the continuously declining customer churn rate and the increasing average revenue contribution per client. As mentioned earlier, Salesforce initially entered the market through small and medium-sized users, with the ratio of small and medium enterprises to large enterprises being 7:3 in 2003, which has reversed to nearly 70% large enterprise users by 2019.

Logically, whether small and medium enterprises can survive in the long term is uncertain, and the probability of them continuously renewing the same SaaS product is theoretically lower. In contrast, large enterprises not only tend to survive longer, but the cost and decision-making process of switching enterprise SaaS services are also theoretically more significant. Therefore, as the number of large enterprises in the user structure increases, it should logically lead to a decrease in the customer churn rate.

Similarly, current SaaS services generally offer multiple pricing tiers for different contract types. Taking Sales Cloud as an example, it can be seen that only large enterprises typically adopt the highest pricing tier, which is equivalent to 20 times that of the entry-level product, exceeding the pricing of entry-level enterprise products by more than 3 times. Therefore, logically, the increase in the proportion of large enterprise users will raise the average product subscription price and the revenue contribution per user. After all, under normal circumstances, large enterprise users are more likely to subscribe to more expensive products.

2. CAC—The Trade-off Between Growth and Profit

From the expense side—customer acquisition cost (CAC) perspective, although there is a lack of sufficient disclosure to break down the marketing costs for acquiring new customers, it can still be seen from the overall marketing expenditure perspective:

① From the company's founding in the 2004s to the fiscal year 2023, over a span of more than 20 years, Salesforce's revenue has grown over 300 times, but there has not been a significant reflection of "scale efficiency" in marketing investment. During the same period, the proportion of marketing expenses to total revenue has only decreased from 57% to 43% Against the backdrop of over 20 years and a 300x revenue growth, the marketing expense ratio has only decreased from over 50% to 40%, which can be regarded as a negligible decline.

From the perspective of marginal increments, the ratio of annual incremental revenue to annual incremental sales expenses has fluctuated between 1.6x and 3.2x in fiscal year 2023 and prior. From this angle, there are no signs of a trend in the ROI of marginally increased marketing expenses.

One could even draw such a "bombshell" conclusion that until fiscal year 2023, even for Salesforce, a well-established and mature SaaS company for decades, the ideal scenario of significantly reduced marketing expenses while user-contributed revenue continues to grow almost perpetually, leading to a substantial improvement in the company's profit margins, has not materialized.

It is worth noting that Salesforce adopts a method of amortization for some of its marketing expenses, thereby matching the narrative logic that the revenue contribution from a single customer is gradually released over an entire lifecycle, which smooths the fluctuations in expense ratios to some extent. However, even so, the conclusion that sales expenses did not significantly decrease before fiscal year 2023 remains unchanged.

Of course, from another perspective, Salesforce spent nearly $30 billion to acquire Slack in 2021, and the merger and expansion are still ongoing. Moreover, before fiscal year 2023, the company's revenue growth rate remained above 20%, indicating it was still in a high-growth phase. And during this high-growth phase, maintaining a significant marketing investment to pursue growth is not a point that needs criticism.

It can be seen that as the revenue growth rates for fiscal years 2024 and 2025 rapidly slide towards around 10%, Salesforce's marketing expense ratio has significantly dropped to over 35%, and its operating profit margin has quickly risen from single digits maintained for over 20 years to over 15%. To some extent, this validates that when a company no longer focuses on increasing user numbers and revenue scale, it indeed has the capability to enhance its profit margins by reducing marketing investments.

Regarding the sources of incremental revenue, only 18% of incremental revenue in fiscal year 2022 came from new users, and after several years of significant slowdown in growth, the contribution from new users is expected to continue to decline. Naturally, after no longer relying on new users for incremental revenue, the need for companies to invest in customer acquisition expenses also decreases.

III. When is it suitable to invest in Salesforce?

The discussion above can be summarized into two main points: ① Reviewing Salesforce's development history, we believe that the company's management team possesses excellent capabilities to continuously explore potential growth directions in the rapidly evolving SaaS industry through effective mergers and acquisitions. Over a span of more than 20 years, they have continuously enriched the company's product matrix while maintaining a high growth rate of over 20%. Therefore, from a qualitative perspective, we believe that looking forward, there is a considerable probability that Salesforce can continue to maintain a relatively leading position in the industry under the evolution of AI. (As the first in the industry to launch AI Agent concept products, this seems to validate this point)

② However, it is equally important to note that if we set aside the potential increment from Agentforce, Salesforce seems to have indeed reached a growth bottleneck. From the trends of the past two years, when there is no longer any growth space, Salesforce still has a marketing expense ratio of over 35%, which indeed has considerable room for decline, leading to an improvement in profit margins. This indicates that the company has the ability to trade off between growth and profit margins.

The final question this article attempts to answer is whether Salesforce currently represents a good opportunity, given that its existing business seems to have lost growth, and although Agentforce has grand prospects (and has driven market preference for the company), it still has considerable time and uncertainty before it contributes to actual performance. Is Salesforce currently a good opportunity? Or when will a good opportunity arise?

Based on the current situation, Dolphin Investment Research adopts a valuation approach that first ignores the highly uncertain Agentforce and only looks at the reasonable valuation of the existing business. Therefore, all the valuations and profit forecasts below do not consider the impact of Agentforce (not considering potential incremental revenue, nor potential incremental marketing expenses, and their impact on profit margins).

First, from a comparative valuation perspective, it can be seen that Salesforce's valuation is approximately 30% to 50% lower than the industry average, whether viewed from the EV/S or EV/FCF perspective. An interesting point is that the current market's valuation of SaaS companies places much greater emphasis on growth than on profitability. It can be observed that Salesforce's FCF margin is significantly higher than the industry average, and the Rule of 40 (a commonly used metric for SaaS companies, which measures revenue growth rate + FCF margin to assess both growth and profitability) shows that Salesforce is only slightly below the industry average.

However, in terms of revenue CAGR and FCF CAGR, Salesforce is more than 40% and 30% lower than the market consensus expectations for the industry average, which is roughly comparable to the magnitude of the valuation discount. From this perspective, if Salesforce's growth performance improves in the future, there is considerable room for its valuation to revert to the average. **

Under the absolute valuation method, Salesforce has a relatively high and stable cash flow, making it one of the few SaaS companies that can be valued using DCF. Based on the following FCF cash flow forecast, we estimate that the neutral valuation of Salesforce's existing business (excluding Agentforce) is approximately $279 per share, which is about 14% lower than the current stock price. In other words, we can understand that if Salesforce's existing business is given a relatively adequate valuation, then the current price has already factored in about a 14% incremental revenue or valuation brought by Agentforce, which is not very high. According to our previous calculations, when Agentforce's penetration rate reaches 5% and 10%, it can bring about 10% and 20% incremental revenue, respectively.

In other words, if we believe that the subsequent penetration rate of Agentforce will exceed 5% to 10%, then there is still room for the current price. The extent of this room depends on how much Agentforce can be implemented in the future.