Salesforce could see lower demand right now, but its fundamental business model makes it well-equipped to withstand a recession, analysts say
- Salesforce and other cloud software companies are well-positioned to withstand a financial crisis, like the one we're now facing due to the coronavirus pandemic, analysts tell Business Insider.
- While Salesforce may feel some near term pressure as corporations cut back on spending, it has a business model and market opportunity that should withstand a recession.
- Salesforce's model of recurring revenue from large customers means even if bookings are slightly up or down between quarters, the company benefits from a longer term financial stability.
- Additionally, the companies Salesforce has acquired recently have expanded Salesforce's market opportunity and customer base.
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As the coronavirus crisis wreaks havoc on the global economy, tech companies, their employees, and investors are questioning how their businesses will be impacted. While tech companies that make hardware or depend on supply chains may have a tough time, cloud software companies like Salesforce are better positioned to withstand a financial crisis, experts say.
Salesforce might find it tougher to sign on new customers and expand deals with existing ones while companies cut back on spending, but in the long run its business model and market opportunity should be strong enough to withstand a recession, analysts told Business Insider.
Like many other software vendors, Salesforce depends on a roster of large customers for much of its revenue. These big customers sign long multi-year contracts, which means they've have already budgeted for spending on Salesforce software.
It's something CEO Marc Benioff told analysts on the company's last earnings call at the end of February.
"93% of our revenue is deferred, so that just gives us tremendous visibility into the future," he said, describing the company's model of subscription software as a "key architecture of our accounting" that illustrates "our deep contractual multi-year relationships with our customers."
If Salesforce's bookings are slightly up or down between quarters, the company's longer term contracts provide a reliable business that ensures stability.
Short term struggles as customers cut costs
In the short term though, as companies try to cut costs and save money, there will be less demand for Salesforce's products. Projects to modernize and upgrade a company's IT infrastructure will likely be put on hold during this economic uncertainty, several analysts said.
"In the enterprise market, among large customers, these CRM digital transformation initiatives are still very high priority," Steve Koenig, an analyst at Wedbush, told Business Insider, "But decisions to actually spend on them or go to the next phase, or initiate them are getting delayed or are at imminent risk of getting delayed."
Additionally, Koenig said his team has heard from Salesforce partners and consultants, who resell Salesforce software, that as smaller companies look to renew their software contracts, they're looking to cut spending costs.
So although those large companies won't get rid of the software entirely, they may not expand its usage throughout the company as fast as originally planned. And since Salesforce sells software that's meant to help companies generate more revenue from customers, it could be more at risk from slowing sales than some other software vendors.
A big focus for Salesforce is how its technology can help companies selling consumer goods better understand their customers. Now those retail stores and brands are struggling to stay afloat as people stay home and spend less money, said Rob Oliver, an analyst at Baird.
"So those are very real issues that undoubtedly will play out over the next few quarters for Salesforce. And so I would view those more near term to medium term, but that's going to continue to probably weigh on Salesforce I think for a little while here," Oliver told Business Insider.
Salesforce will bounce back quickly
Daniel Elman, an analyst at Nucleus Research, agreed that Salesforce might have a harder time acquiring new customers and that existing customers would slow down in expanding their existing subscriptions, but said in the long term it will bounce back faster than other companies.
Salesforce is helping businesses go through the process of modernizing their IT and software tools, which makes it a critical partnership for many companies, even if those modernization efforts are put on hold for a while. So in general, customers will stick around, even during times of economic uncertainty.
"Salesforce has been shown to consistently deliver value to all their customers," Elman told Business Insider. "They're providing a pretty essential service when B-to-C brands are looking to stand out in a crowded marketplace, Salesforce lets them do that."
Additionally, in recent years Salesforce has acquired many companies and expanded its product offerings, including its $15.7 billion acquisition of data analytics platform Tableau last year. This has expanded Salesforce's market opportunity because those companies also bring their customer base to Salesforce and now Salesforce has new types of software to sell, Elman said.
"That presents a huge cross sales opportunity for Salesforce with those Tableau customers. Given that it's like you're already using Tableau, you're already paying Salesforce in a sense, so you might as well just turn on the other aspects of it," he said.
Another big advantage Salesforce has is its free online learning platform, Trailhead. It's a way for people to get new skills for free, at a time when many companies are having to lay off workers. It also expands Salesforce's network of customers and offers another piece of value.
"It expands the whole network of Salesforce professionals and therefore grows Salesforce's whole ecosystem," Oliver said.
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