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Why Salesforce.com Became a Better Investment Prospect in 1Q16

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Improving margins and cash flow increase investor confidence in Salesforce.com

With a market cap of $47 billion, Salesforce.com (CRM) is the biggest player in the CRM (customer relationship management) space. It typically posts revenue growth in the 30% range.

Nevertheless, the company has been criticized for preferring revenue growth over profits. Margins, profitability, and cash flow at Salesforce.com have been a bone of contention and an impediment to the company being considered a viable investment option.

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With 1Q16 results, however, we see an improvement. This quarter marks the fourth consecutive quarter during which margins have expanded at Salesforce.com. The company posted operating cash flow of $731 million, a YoY (year-over-year) increase of 54%. It also posted free cash flow of ~$660 million in 1Q16, up from ~$413 million YoY.

Salesforce.com revenue growth rates continue to lead in CRM space

The above chart looks at 2014 worldwide CRM sales and compares the revenue growth rates of the industry’s major players. Salesforce.com leads by a significant margin, with a 28.2% revenue growth rate. It’s followed by Microsoft with a 21.7% growth rate. IBM (IBM), SAP (SAP), and Oracle (ORCL) respectively registered ~10%, 7%, and 2.6% growth rates.

According to a May 2015 Gartner report on worldwide CRM, Salesforce.com leads in the space with an ~18.4% market share, as the above chart shows. This is the third consecutive year that the company has held this leadership position. And, it’s this leadership in the CRM space that attracted Microsoft (MSFT) and other legacy players to acquire Salesforce.com.

Fiscal 2Q16 expectations

Salesforce.com expects fiscal 2Q15 revenue and EPS (earnings per share) to respectively range between $1.59 billion and $1.6 billion and between $0.17 and $0.18. For the full fiscal 2016, Salesforce.com expects revenue of between $6.52 billion and $6.55 billion and EPS in the range of $0.69 to $0.71.

For diversified exposure to Salesforce.com, you can invest in the Technology Select Sector SPDR Fund (XLK). XLK invests about 1.07% of its holdings in this company.

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