Salesforce (NYSE: CRM) has suffered a slew of detractors over the years. Analysts have repeatedly argued that the company is overvalued or would never survive. And yet, here it is, still going strong.

Salesforce is a prime example of a company that stuck to its knitting, pursued its vision, and executed its mission.

And yet, even as its revenue continues to grow, is the company generating enough of a profit to justify its sky-high valuation?

Let’s see if Salesforce is cheap or overvalued, and what 2019 has in store for the stock.

What Is Salesforce?

To make a Salesforce stock prediction, we must first understand what this company does.

Salesforce offers enterprise cloud computing solutions, focused on customer relationship management (CRM). A snapshot of the company’s products:

• Sales Cloud stores data, monitors leads and progress, forecasts opportunities, and provides insights using analytics and relationship intelligence.
• Service Cloud allows companies to deliver personalized customer service and support, and helps connect agents, dispatchers, and mobile employees through a centralized platform.
• Marketing Cloud allows a company to personalize, plan, and optimize customer marketing interactions.

The company also offers its Salesforce Platform, an advanced enterprise app.

How Has Salesforce Stock Performed?

• Over the past year, CRM shares have gained 35% whereas the S&P 500 has lost 6%.
• Over the past two years, CRM shares have gained 95% whereas the S&P 500 has gained 16%.
• Over the past five years, CRM shares have gained 161% and the S&P 500 has gained 49%.

How Has Salesforce Stock Performed in 2017/2018?

• In 2017, Salesforce shares gained 45% whereas the S&P 500 gained 19%.
• In 2018, Salesforce shares gained 35% whereas the S&P 500 lost 6%.

Who Are Salesforce’s Rivals?

CRM’s competitors are massive Silicon Valley stalwarts.

Microsoft (NSDQ: MSFT)

If you were around during the dot-com bubble of 1999, you might recall that MSFT was known as one of the “Four Horsemen” of the NASDAQ. Then Bill Gates resigned, Steve Ballmer took over, and the company fell fast asleep.

Microsoft new head honcho Satya Nadella woke up the company. Now Microsoft is more of a service company, because Nadella’s big move has been to transform the company into a subscription service business. Microsoft went full steam ahead into cloud-based services, currently a prime driver of the company’s growth.

Microsoft’s strategic redirection shows how the tech sector is constantly evolving. Today’s tech hero can become tomorrow’s goat, and vice versa.

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MSFT’s latest innovations include Microsoft Dyanmics CRM, which enjoys strong tech analyst ratings.

Oracle (NYSE: ORCL)

Oracle remains one of the premium names in cloud-based networking services.

Oracle is a world-class brand in creating products that handle human capital, customer relationship management, project portfolio management, enterprise performance management, procurement and supply chain management, and enterprise resource planning.

Oracle’s Siebel is a direct competitor to Salesforce. This product delivers a combination of transactional, analytical and engagement features to manage CRM.

SAP (NYSE: SAP)

SAP has long been a popular name in the enterprise application software market. SAP is another world-class brand name in the field of business intelligence and analytics.

SAP’s products allow businesses to analyze and process live data, and manage that data as it comes in from different sources. SAP’s CRM offerings help clients better engage customers in person, online or via mobile.

Will Salesforce Stock Go Up in 2019 (Should You Buy?)

Salesforce’s revenues have been growing like gangbusters every year. In 2014 the company generated $5.4 billion in revenue, which increased to $6.67 billion the next year, $8.4 billion in 2016, $10.5 billion in 2017, and $12.5 billion over the past 12 months.

This video summarizes Salesforce’s business model and helps explain why the company has racked up such impressive revenue growth:

There’s no doubt that Salesforce is a major player in the CRM market. The problem is that it is a very large market. On the one hand, that means there is plenty of revenue to go around.

On the other hand it means that competitors are always battling over market share. Salesforce could eventually get crushed by a bigger Silicon Valley player, especially one that’s making big forays into cloud computing.

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Salesforce plows considerable money into marketing to differentiate itself from its giant competitors. The company also must reinvest a lot of cash into research and development, so it doesn’t fall behind with innovations.

Salesforce sports a $117 billion market cap. Trailing 12-month (TTM) net income was $818 million, after adjusting for a higher 2017 tax bill due to the Trump tax cuts. Thus, CRM stock is trading for a ridiculous 141x trailing earnings.

Analysts project five-year annualized earnings for CRM of 33%. We give a 10% premium to that number for each of the following: World-class brand name (no), significant cash hoard (no), and/or robust free cash flow (no).

However, with a company that is growing at more than 15% per year, we bestow a price-to-earnings growth (PEG) ratio of up to 2.0.

Alas, CRM trades at 141x, so even with 33% earnings growth, it has a PEG ratio of over 4. We don’t see it as underpriced on this basis.

Will Salesforce Stock Go Down in 2019 (Should You Sell?)

A major problem is that along with Salesforce’s revenue growth, expenses have been climbing as well. The company posted a $263 million loss in 2014, a $47 million loss in 2015, a mere $23 million gain in 2016, and a gain of only $127 million in 2017. After the company drastically cut expenses, net income grew to $818 million in the past 12 months.

Fortunately, free cash flow has been positive and reasonably consistent during this period. Between 2014 and 2018, the company generated between $700 million and $2.6 billion of free cash flow each year.

But it’s difficult to consider CRM as being overpriced. We can look at how competitors’ stocks trade to see if we are at least in the valuation ballpark.

MSFT and ORCL earn all three premium valuation bonuses; SAP does not.

SAP has a market cap of $126 billion. On $4.19 billion of TTM net income, it trades at almost 30x earnings. Wall Street gives SAP a five-year growth estimate of 8.5%.

Oracle has a market cap of $176 billion. On $10.9 billion of TTM net income, the stock trades at 16x earnings. Including the valuation bonuses, Oracle’s five-year earnings growth estimate is 13%. Oracle trades at a PEG ratio of 1.27, so it’s relatively cheap.

MSFT has a $765 billion market cap. It has TTM earnings of $48 billion (after adjusting for the Trump tax cuts). MSFT stock is trading at about 17x trailing earnings.

Including the valuation bonuses, Oracle is growing at 17.9%. Microsoft trades at 17x, with a PEG ratio of 0.95. Anything under 1.0 is a value. SAP trades at a PEG ratio of almost 4.

The verdict: CRM stock is mighty pricey.

Overall Salesforce Forecast and Prediction for 2019

Salesforce has exhibited volatile short-term trading behavior. Share price fluctuations greatly depend on earnings results from quarter to quarter, as well as earnings in relation to Salesforce’s three main rivals. Over the short term in 2019, CRM’s fortunes will depend on the company’s execution.

However, CRM is one of those stocks that has been perpetually overvalued on just about any metric. Even though CRM’s valuation isn’t justified by its net income, it also has developed sustained investor enthusiasm. Our estimate is that for 2019, the stock has about 5%-10% upside. But brace yourself for sharp reversals along the way. This stock is not for risk-averse investors.