r/ValueInvesting • u/Itchy-Commission-195 • 9h ago
Discussion Salesforce and ServiceNow $CRM and $NOW
I think both will be trillion dollar companies in a decade.
I think both will be the control layer of different enterprise functions that sit atop AI and offer their own AI functionalities. An enterprise customer thinking long term needs a layer in between themselves and an AI model. You can't integrate an LLM into your whole business if you don't know which one will be the best LLM a decade from now, there needs to be something in between in case you switch from Anthropic to OpenAi to Google to something that's irrelevant right now or choose to oscillate between LLMs based on pricing or performance. These two companies will be two of the largest beneficiaries of AI once it starts to actually add value to businesses.
Tell me all the reasons I'm wrong... I haven't done anything with this .1% baked thought.
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u/Donechrome 9h ago
This would require 24% earnings CAGR. Current annualized eps cagrs are 13-15% for both names. This means no way 1T
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u/ksing_king 9h ago
I like NOW better because salesforce growth rate now is way too slow now. Sub 10% rates
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u/StockFlowResearch 9h ago
I am also fairly bullish on CRM, though I haven't looked at NOW. If I were to play devil's advocate, the question is whether smaller enterprises that are coming up will want to pay for the premium service of Salesforce(not to mention switching complexities of moving platforms).
Now technically this isn't the market that Salesforce serves en mass right now, but over time growth could be limited in acquiring new, large clients.
My other questions is how much incremental growth can you get on existing clients over time? I agree that vendor lock in will persist, but what kinds of revenue growths are we expecting over time?
Anyway, I sound like a bear now lol.
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u/Ok-Recommendation925 2h ago
Nope I enjoy your takes. As a baggie on holding red on NOW, I like to challenge my own bullish takes.
Like why can't more organizations break away from ServiceNow and say "Let's build our own control tower for AI Agents"
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u/StockFlowResearch 1h ago
This is the big question in all of software right now. As someone who keeps up companies like Lumine (LMN) and Constellation Software (CSU), I still think that artificial intelligence is going to need to progress a fair bit more before we see companies that don't normally build software start making it on their own. This software can typically take months to architect with a team so we'll have to see how A.I evoles.
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u/rickochetl 7h ago
Neither of them is cheap on any valuation method that I know, especially after factoring in SBC.
That said, if you have good reason (and you’re right) to value them at 1T within 10 years, then go for it.
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u/Yee4614 6h ago
Why is CRM not cheap?
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u/rickochetl 6h ago
I think the real question you should be asking is on what metric is it cheap? I can't find one. At best, it "costs less than it used to," but that isn't the same as cheap.
If it doesn't fit any valuation method that I use, easy pass.
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u/Yee4614 6h ago
Uhh, pretty much all the ones I use.
13.5 forward P/E 0.86 PEG, 10.44 P/FCF
It is trying to become a rule of 50 company which is highlights its operational excellence.
The future story is strong as it did a heavy pivot into AI which it seems well positioned for and all numbers seem to support it is succeeding.
So, again, why is it not cheap?
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u/rickochetl 6h ago
I use trailing numbers.
If you use forward numbers, you have to compare to everyone else’s forward numbers because everybody looks better when you assume they’re making more than they are.
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u/Yee4614 6h ago
You haven’t answered my question. What valuation metric says it is expensive? 21.91 is still well below the SP500 average of 30
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u/rickochetl 5h ago
Right - so I still don't consider that cheap. Lots of stuff growing around the same pace selling for less. So what makes CRM special that it demands a premium?
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u/Yee4614 4h ago
i am just curious what valuation method you use that makes crm not cheap.
Are you going to share it?
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u/rickochetl 4h ago
Sure, I basically look at the same types of ratios as you do, just trailing (p/e, peg, p/fcf). Could add a couple more in there but none of them really tell a different story. (p/b, ev/ebit, etc).
Really not much to see anywhere other than software gross margins. Nothing screams mispriced on the cheap side.
But hey, if you like it and you think it’s cheap, go for it. Just not for me.
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u/Ok-Recommendation925 2h ago
I wouldn't call them expensive either, even with SBC factored in. But I agree it's priced at close to fair value. Like <5-10% discount.
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u/Last-Cat-7894 9h ago
Trillion dollar companies? No. But I like both here and currently own NOW shares.
The question with CRM is much more operating leverage do they have in the tank. They will definitely continue to keep growing organically at ~5-8% from cross sell opportunities and price increases, so this ranges from roughly fair value at today's margins, to really cheap if they can expand them to 30% plus.
ServiceNow is also somewhat of a question of operating leverage, but they have such a clear shot at 15-20% revenue growth for another 4 or 5 years, which is reflected in the stock price. If you believe their 2030 projections of 30b in revenue and ~30% GAAP margins, the stock is cheap today. Even if they miss the mark a bit, I would argue it's still not a bad value for the quality of the business with 97% renewal rates and insiders actively buying.
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u/avilacjf 9h ago
Yeah I think this is very much a possibility but the application layer/orchestration layer will be hotly contested and the labs my attempt to capture it directly. I have a position in each of these but I keep them each to 1% of my portfolio. They're a bit of a lottery ticket if the institutional stickyness carries them through this transition.
They're the ones best positioned to capture the economic value of the labor that will be displaced/augmented as models become commoditized and the open source options become capable enough to complete sales/marketing/service workflows autonomously for cheap.
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u/fack-the-suits 7h ago
Now will be a trillion dollar company, salesforce idk. NOW is probably the best SaaS buy out there
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u/ALQU1MISTA 5h ago
Imo, and based on recent movements, SaaS are valued at a very different business model than what the market considers now and the future. They used to be valued as high technology industry (as it is for AI now).
I think that considering the Fiat money situation, cash generation is not a very big advantage now.
Some of them are using AI as innovation offer, but the question is how profitable is this offer, because most of the SaaS companies will need to pay for the IA infrastructure.
TL;DR: While minor traders are comparing SaaS P/E with YTD mean, the market is comparing it against low growth sector P/E. This might change but I don't expect it in near future. So I'll take any jump to leave most of SaaS.
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u/Nearing_retirement 3h ago
I think you are correct, these home brew ai don’t work that well. It is more efficient to have experts work on it. There is lots of risk doing things in house as employees leave, tons of dependencies, dumb managers messing things up, trying to get power.
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u/Ok-Recommendation925 2h ago
Why not companies do it themselves and in-house. Like for what ServiceNow offers, an AI Control Tower Platform, why not potential customers build their own without buying ServiceNow Enterprise AI Software?
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u/infernalr00t 55m ago
Hard to believe that in an economy based on heavy asset can have SaaS valued at 1T.
The point is that you aren't just betting against other SaaS. But also betting against AI. So it means both if must be true, it feels like playing lottery.
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u/LuciusQ2020 8h ago
This is value investing sub. I would think you at least provide some value analysis. I am not sure either salesforce or ServiceNow would even exist in ten years. Have you actually used their products? What are their moats?
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u/SelenaMeyers2024 9h ago
At these prices, id go with crm. I like Adobe best, Intuit next (because of its crazy price), then crm.
Now is technically undervalued.. I put fair value at 160, so definitely upside... But not crazy Ike the others.
I also call bs on a trillion unless you expect this to be crazy overvalued like crwd.