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Outside the Box: For Salesforce investors, Slack must start supercharging growth — and the stock price

While Salesforce has been consistently increasing both sales and profit – including the 23% increase in revenue in its latest quarter — the software company hasn’t been able to reward its long-term investors.

Even after a four-week run-up, the stock price
CRM,
+3.67%

is just below where it was 12 months ago, even as the Nasdaq Composite
COMP,
-0.55%

and the S&P 500 index
SPX,
-0.49%

have climbed. That’s a tough pill to swallow for one of the most innovative software companies in the world. 

What investors are missing, however, is how growth in the Platform business, already the largest part of Salesforce’s business, will be supercharged by the Slack acquisition. The $27 billion deal, which closed in July, will tie together Salesforce’s disparate offerings and could make it one of the two most influential players alongside Microsoft
MSFT,
-0.74%

in the Remote/Hybrid work economy born out of the COVID-19 pandemic.

For many who have scrutinized the Slack deal, it was hard to know if $27 billion for a company that only reached a $1 billion revenue run rate in the 2021 fiscal fourth quarter that ended Jan. 31 was too much. A multiple of 27 times revenue isn’t obscene by any means, but Slack had been somewhat sputtering since its IPO, failing to meet some of the company’s early excitement. This was further reiterated by Slack’s solid but relatively tame growth in the early parts of the pandemic, while Zoom Video Communications
ZM,
+1.08%

and Microsoft Teams were adding customers and increasing revenue at triple-digit growth rates.

If there was ever a time for Slack to have exploded, it should have been then. 

Salesforce had challenges of its own that it had identified, and these played a part in the decision to acquire Slack. It had to have known it would struggle to compete with Microsoft Teams and the red-hot Microsoft Platform built on top of Azure. The pandemic and the trend toward hybrid work threatened to widen the gap, as Microsoft had all the pieces and was building solution after solution to address remote work requirements. Salesforce needed a solution that could successfully compete with Microsoft — and Slack was the missing ingredient.

Microsoft has seen incredible growth across its infrastructure, platform, and software, tying together its Azure offerings with streamlined connectors and integrations in its platform to tie together the entire Microsoft ecosystem. Teams, Dynamics, Windows, Office, and the mountain of available enterprise data are all available in a single stack–all of which is being increasingly built to operate together.

Salesforce had long sought to have that anchor point similar to what Slack will offer. Smaller acquisitions like Quip gave some semblance of a more collaborative ecosystem under the Salesforce umbrella, but it was never enough to make it competitive with Microsoft’s vast ecosystem of productivity, collaboration and business applications.

The company also had tools like Salesforce Chatter, which added social elements inside the applications for asynchronous chat. However, in the post-pandemic world, businesses want a new type of operating system, a digital core that runs in our chat, messaging, and meeting applications, and ties in with CRM, ERP, Data Platforms, and Cloud Infrastructure.

Slack provides a path for Salesforce to deliver, especially with the tie-in of other acquisitions like MuleSoft and Tableau as well as recent strategic and product updates like the company’s hybrid cloud platform, Hyperforce, and its partnership with Amazon’s
AMZN,
+0.53%

AWS unit.

For Salesforce, winning the hybrid workspace in the enterprise is a significant opportunity to expand net revenue by increasing the spend per user. The adoption of Slack is a crucial data point for investors, given that is one of the most telling indicators for future groupwide growth. 

When it comes to this hybrid work-induced digital business core, there are really only two companies that have all the pieces right now. Microsoft and Salesforce. Microsoft is fully integrated and is most certainly firing on all cylinders after successive quarters of robust growth.

Now Salesforce, with Slack in tow, is building something that should compete with what Microsoft is doing. And even with Microsoft’s successes, the demand for a fully integrated solution for managing post-pandemic work will be in demand, and Salesforce is all but certain to be a significant beneficiary. 

Daniel Newman is the principal analyst at Futurum Research, which provides or has provided research, analysis, advising, and/or consulting to Microsoft, Zoom, Salesforce, AWS and dozens of other companies in the tech and digital industries. Neither he nor his firm holds any equity positions with any companies cited. Follow him on Twitter @danielnewmanUV.

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