Salesforce (CRM) - Cloud Computing And The End Of Software

by Alex Mason | Companies, Episodes

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Mental Details


  • Salesforce is the leader in CRM (customer relationship management) software. By focusing on the cloud from the industry’s infancy, they’ve grown to become a major business that serves most of America’s large companies.
  • In today's episode we cover the history, business model, financials, and future outlook of Salesforce.


  • Alex Mason: Today, we're talking about Salesforce. Salesforce is a company that uses cloud-based technology to help businesses analyze and act on customer data. I'm Alex Mason, host of stock stories. This is the podcast where we decode investing principles by analyzing the business behind the stock, as well as learning about mental models in order to help you become a better investor.
  • [00:00:24] You ready? Let's go.
  • [00:00:56] Welcome. Welcome to the show. This is the stock stories podcast, and yes, my name is Alex Mason. I am your host and stock storyteller. Thank you so much for joining me. This is the podcast where we decode the business behind the stock, and we look at mental models too. We're becoming better investors together by looking at these real companies.
  • [00:01:20] Understanding them figuring out where they came from, what their business models are, what their finances are like, because we can be more informed and therefore more empowered as individual investors. When we have all of this knowledge. And not just knowledge, but what do we do with that? How do we synthesize things?
  • [00:01:38] How do we put it together? How do we figure out if this is something worth digging into deeper, as far as our own personal research in our own portfolios. So thank you again for joining me. We have another episode for you today, and I'm really excited to be covering another company we're going to be looking at as we usually do companies in the S&P 500.
  • [00:02:02] One of my goals for the show is to go through the entire S&P 500. So we're going through component by component. And then a few other companies in there as well, once in awhile, but that is one of the primary goals of the show. And I'm very excited to further that goal with this episode here today.
  • [00:02:21] So as I mentioned, we're going to be talking about Salesforce, jumping back into the tech scene a little bit, talking about this company that really revolutionized things with cloud computing. So the way that these episodes are structured, if you're new to the show, first, we talk about the history of the company to provide some kind of a context.
  • [00:02:42] Then we look at the business overview and try to understand what actually makes the business tick today. What is it that the business sells and. How does it function at a very basic level? And then we wrap up with the finances. We need to look at the finances, of course, as investors, because we need to understand is the company making any money and how much money could it make in the future?
  • [00:03:06] So we look at those things in order to have a better understanding of the company and the stock so that we can make better investing decisions. All right, you ready? Let's get into it. We're going to talk about Salesforce.
  • [00:03:32] All right today, we're talking about Salesforce, ticker symbol CRM. So where did Salesforce come from? We'd like to understand a little bit of the context of where did the business actually come from? How did they start? Well, the business model behind Salesforce, I think is important to talk about first, the use of cloud-based technology to support business data analysis.
  • [00:03:59] Is what's called customer relationship management or CRM for short, you know, you'll notice actually that the ticker symbol for Salesforce is in fact CRM because that's very ingrained in what the DNA of the company is. They're all about managing customer relationships through technology, specifically cloud-based technology.
  • [00:04:21] So let's take it back to the 1990s. Back then large tech firms were really successful, at revolutionizing the corporate world by introducing what's known as enterprise wide software. So many businesses, they had never used software of any kind before. I mean, software was a new thing for them. And now all of a sudden they were given these digital tools to speed up and automate their internal processes.
  • [00:04:48] So they were able to create goods and services in a more efficient way and therefore make a lot more profit. It was this huge technology revolution in the nineties because. The internet and computers were becoming truly mainstream for the first time ever. So see, episode one 45, where we talked about one of those companies SAP, and then also, if you haven't listened to it already check out episodes 90 and 92, where we discuss Microsoft, I'll go ahead and link those episodes in the show notes.
  • [00:05:23] So back in the 1990s, there was this man named Thomas Siebel. And he was an executive at this computing firm called Oracle. And he came up with this idea to create enterprise software that it wasn't just for internal company processes, but software that was specifically for things like marketing or for sales or for customer service.
  • [00:05:47] So instead of just looking inward at the business, they were looking out to customers and other vendors and other stakeholders. So he brought this idea to a man named Larry Ellison, who was the founder, who is the founder and CEO of Oracle. And unfortunately Larry said, you know what? Ahhh... Not really going to do that.
  • [00:06:09] Let's let's not do that idea. So he rejected that idea. And so Tom Siebel, left Oracle, and he created Siebel systems in 1993. And that was the first company to have customer relationship management software throughout the nineties. This company grew and grew as many tech companies did during this period.
  • [00:06:31] And by 1999, it had grown significantly. And that was the year that it actually became. The fastest growing technology company in the United States, which that's no small feat, especially for a company in the late 1990s. Other tech companies at the time started catching onto this idea, including Oracle itself.
  • [00:06:53] And then guess what happened. Oracle went around and purchased Siebel systems from Thomas Siebel in 2006 and ended up making Tom Siebel a billionaire. One of the people who caught onto the idea was another man by the name of Mark Benioff. And he himself was an executive at Oracle too. And this guy, he was just a young up and coming guy in the organization at just the age of 26.
  • [00:07:22] He was promoted to vice president and he worked in sales. He worked in marketing, he worked in product development. He was a rising star at Oracle. But ultimately he decides to leave Oracle too. In 1999, he left the company because he wanted to focus on this idea of customer relationship management and remember at this time, Oracle had not yet purchased Siebel systems yet they waited until 2006.
  • [00:07:48] So this is seven years before that happened. And he decided, you know what, I'm going to leave and kind of focus on this. Now his father was hesitant. He warned him not to quit. A stable job, but he did it anyway. So after quitting Benioff, he didn't immediately start Salesforce. Instead he took a sabbatical, he did some traveling.
  • [00:08:11] He did a lot of thinking. He did some things that a lot of people would consider. Pretty awesome. Like swimming with dolphins in Hawaii, he traveled through India. He met the Dalai Lama. And then he also met this Hindi guru named Ama who reportedly gave him some really great insight. And at the time Benioff, he was really struggling with like what he should do with his life.
  • [00:08:37] He had a lot of professional success up until that point already just in his twenties, but he was trying to figure out what he wanted to do next in the world. You wanted to. Be really ambitious with his career, but he also wanted to give back to the world in a really big way. And he saw those two things as conflicting.
  • [00:08:55] And the insight that Ama gave him was that instead of having to make a choice between doing good for the world and pursuing his career ambitions, he realized that he could do both and he could do both at the same time. This awakening is what later led to Salesforce's culture, which is something that we'll get to a little bit later.
  • [00:09:16] Benioff along with three other people started Salesforce in an apartment in the Telegraph Hill area of San Francisco, California. And they received some initial funding actually from Larry Ellison, who was Benioff's former boss, as well as some other investors. So I think it's kind of interesting that the part of the story that Larry Ellison plays.
  • [00:09:38] He was this executive at Oracle, which wasn't nearly as big of a business as it is now, but still a pretty powerful up and coming tech company. And even though he wouldn't necessarily back this idea internally, he backed the idea eventually. And he ended up buying Siebel systems in 2006 and he was an initial investor into Benioff's venture.
  • [00:10:01] So he knew that these guys might be onto something. And even though he wasn't willing to initially risk the money and resources to build it into Oracle's business, initially he did ultimately invest heavily in the sector. And that just goes to show you that sometimes as an entrepreneur or an investor or a founder, you don't have to get it right the first time necessarily you can notice things later and change your mind and it might work out.
  • [00:10:31] So just a little bit of a tidbit about Larry Ellison there. Now, one thing that Benioff did from the start that differentiated him from Siebel was that he was using the, for computing tasks. He wasn't using software that was stored on compact discs, which pretty much is how all software was delivered back then he marketed Salesforce as literally quote unquote, the end of software.
  • [00:10:57] That was his big marketing slogan. Now by shifting customer relationship management tools to the cloud Benioff took Siebel's idea a step further, not only was he focused on software and software that would help with marketing and sales and customer relationships. He said, you know what? This is great, but we're just going to do it through the internet because that's ultimately where things are going.
  • [00:11:19] That's ultimately better. Now there's a lesson here that I want to touch on. Fast-growing industries such as the technology space, they can have multiple winners in the same niche. I mean, Siebel and Benioff. They're both billionaires because of the work they've done though. Benioff's legacy will likely be the one that's greater known because he ultimately took the product further.
  • [00:11:42] Not as many people know about who Tom Siebel is and Siebel systems because he didn't take it as far, even though he was the first one to do it. And also he got acquired many years ago now, however Benioff, he took it further and he has a business that has continued to thrive and is now a huge, huge company.
  • [00:12:07] So it's just an interesting lesson there. Now in 2004, Salesforce went public. They went public on the New York stock exchange. They raised over $110 million in their IPO. And Larry Ellison, as I mentioned, he was actually an early investor in Salesforce too. So he got some of that equity. Over the years, Salesforce they've made several acquisitions.
  • [00:12:30] They've done a lot of things that you would kind of expect fast growing tech companies to do the most notable. Other acquisitions I would say is of a couple of companies. One is a data analytics company called Tableau which they bought in 2019 for over $15 billion. And then actually relatively recently, they bought Slack in 2020.
  • [00:12:55] and that was for over $27 billion. That was a huge acquisition. So they've been making some moves in the digital cloud-based space. Okay. Now let's talk about the business overview. What is Salesforce actually do? I mean, it's good to know the context. It's good to know the history of how things came to be, but what does this business actually do to make money?
  • [00:13:20] Although the company has certainly grown since its founding into a bunch of different areas. The heart of the business is still customer relationship management software. So they sell software and they sell it effectively as a service. Now I see CRM as this next evolutionary phase of ERP or enterprise resource planning software that was created in the 20th century centralize automated software that captures customer data in order to make better decisions and build better relationships.
  • [00:13:55] That's the kind of business that is expected to reach over $114 billion in annual spending. In 2027. So this is big business here. All right. This is technology being scaled up in a really big way. Now Salesforce is systems. They're not just about helping collect data. There's a lot of businesses and a lot of pieces of software that can do that.
  • [00:14:21] But the real value that I see for this for businesses is that the insight you can get from that data, Salesforce helps provide insights that make that data actionable. That's a big piece that I just want to linger on for a minute. It's not enough to just collect information. The amount of data that's being created in the world per second is only going up and up and up exponentially.
  • [00:14:47] As more people become connected to the internet worldwide, as more people create content faster and easier than ever before, such as this podcast. I mean, it's just amazing the amount of data that's being created. But is that data actually being used to help people? Is it being used to further some objective that's really where the genius of Salesforce comes in and other businesses like it is they can take that data and then connect it to other businesses or other applications in order to actually generate insight.
  • [00:15:18] So looking for patterns, looking for connections, looking for things that otherwise would be very hard to see if. We were looking at systems without massive amounts of data being connected and parsed and looked at in many different ways. So in 2021, over 150,000 companies use Salesforce's software that's.
  • [00:15:44] As of right now, that's a lot of companies and measured by revenue. They've been the number one sales provider of customer relationship management software. For over seven consecutive years. So they're definitely the leader in this space. There are a lot of businesses out there that do customer relationship management, but they're not the leader in the space.
  • [00:16:05] It's more of a secondary or tertiary business for them, either that, or they just aren't as competitive as Salesforce is now, Salesforce offers a few different cloud services. So let's break this down into the different parts of the business. First we have the sales cloud. This is what allows companies to monitor their leads and enable their sales teams to sell faster.
  • [00:16:30] And hopefully not just faster, but actually smarter too. So imagine you have a business that you have a sales team out there. That's trying to get customers and a bunch of different ways where you can monitor and track all of those things in a centralized way through this sales cloud. The other part of the business is service cloud.
  • [00:16:50] This tracks and provides insights on customer service data. So imagine you're in the hospitality industry and customer service is a huge. Piece of piece of data that you want to learn, or a huge realm of data that you want to learn from. You can use that through the service cloud. Another is the marketing and commerce cloud.
  • [00:17:12] This tracks everything about the customer experience. So you have like sales, which is the customer comes in the door. You have service, which is what you do while the customer is there. And then you have marketing and commerce, that's everything kind of in between. So what is the shopping experience like?
  • [00:17:31] This is ultimately designed to generate higher revenue and higher conversions. Because when your customers are being served more effectively in every aspect of their experience, they're more likely to stick around longer. They're more likely to spend more. They're more likely to recommend to their friends, all those good things.
  • [00:17:47] All those good customer related metrics are enhanced by actionable data that you can collect and connect from these cloud-based services. And then the last part of the business is called the Salesforce platform and the other category that includes things like the, they call it the customer three 60 platform, which is a cloud-based solution for it professionals.
  • [00:18:12] So it professionals, they can use that in order to connect via the cloud. And then there's other business lines such as the acquisitions that I mentioned, like Tableau, which is really good with analytics. And that's just a better understanding of business data. I can speak a little bit personally to this one because I do use Tableau on a regular basis and it is really powerful stuff.
  • [00:18:36] It's just great to me. I see it as the next level of what a spreadsheet is. Basically. It's a way to, at least the way that I've used it is through data visualization. You can. Visualize data in so many different ways and it's interactive and as dynamic and you can filter things. It's just a lot more intuitive than having to program this really long, big Excel sheet and create pivot tables.
  • [00:19:06] And if you're, if you spend a lot of time in Excel, like, like I have, you know, what I'm talking about, there's just a lot of different formulas and things that you do in there. Well, whereas Tableau the they not only make it easier to create those kinds of things. Like the output that you actually want to see, but you can manipulate it and change it.
  • [00:19:26] I would say easier than something like a Microsoft Excel. So that's one side of the business that I have personal experience with. And I think that there's definitely something there, it's a great piece of software, at least the part of it that I've used. Now we have these four segments. So the revenue of the business is split between these four segments and it's relatively even.
  • [00:19:49] Except for the marketing and commerce side of the business. That's about half as much as the other three, but the flip side of that is that is growing faster than the other three. So they have these pretty balanced business model of cloud sales for software for all different types, pretty much anything that you can think of related to how businesses work on the internet.
  • [00:20:12] They help serve them in one of those ways, which I think is pretty cool that they, it seems like they have all these different bases covered. Now, the company currently sells the vast majority of its services in North America. However, a third of their revenue comes from a combination of Europe and Asia.
  • [00:20:32] So there's still mainly United States based company, but they do sell the services globally. And. Revenue in all of the regions are growing. So this is definitely a growth business. Another thing that's interesting about this business is the culture reading a little bit about Salesforce is culture. They have this culture that hearkens back to Benioff's experiences when he was on his sabbatical, which is this Hawaiian idea of the spirit of Ohana and.
  • [00:21:05] This term Ohana. It means intentional family. And in the corporate context, what I take it to mean is that it's describing the connectedness, the love and the loyalty that employees share with each other. As teammates. If you look at your teammates, as someone who you really connect with, as someone who you're loyal to, as someone who's really like a family, you're going to treat them better.
  • [00:21:30] Now, I don't know whether this is just. Corporate mumbo-jumbo or this is really in the heart and soul of the company. That's I think a little bit deeper of a question, a little bit harder of one to answer and whether that's for real or not, this is just from my own personal research, but I don't really know if that's the case.
  • [00:21:51] Right. A lot of companies talk about how great their culture is, but from everything I read about Benioff and his history and his. Kind of swagger. I can get the sense that, yeah, Salesforce probably is somewhat like that because a company's culture tends to mirror the temperament or personality of the people who are leading it.
  • [00:22:13] And Benioff seems to be like a pretty dynamic personality. So I think there may be something to that.
  • [00:22:21] Okay. So let's talk about the financials. It's all great to learn all these things about the business model and the history, but the company has to make the finances work. The finances are imperative for us as individual investors to understand at least at a fundamental level, how things are working in the business.
  • [00:22:43] So as I usually do on these shows, I'm going to look at. A couple of different data points. You're going to look at the year 2013 fiscal data and 2020 fiscal data. I don't want to overwhelm you with numbers, but I want to provide enough for you to get a sense of how the business is actually working financially.
  • [00:23:00] So let's go over this first. We look at sales. How much money are they making in sales? Well, in 2013, the company had about $3 billion in sales and in 2020 17 billion. That's a huge, huge, huge growth rate. That means they grew their revenue at 28% annually. Very impressive. This is definitely a higher growth firm.
  • [00:23:25] And what about profits? Well, the profits have fluctuated a lot, actually a little bit more than I expected. In 2013, they actually lost over $270 million. And then in 2020, they made over $120 million. And this number fluctuates a lot and that's reflected in the earnings per share, which we'll get to now in 2013, the company lost almost $2 per share.
  • [00:23:51] And in 2020 they made 15 cents per share. So that's kind of hard to see trends just from those two numbers, but let's keep going and see what else we can learn from this business. If we turn our attention now to the balance sheet, I love to look at the cash balances. In 2013, Salesforce had. $1.7 billion in cash.
  • [00:24:11] Okay. That's not bad. And then in 2020, they had just under $8 billion in cash. That's a huge increase in the cash balance. To me, that's very favorable that tells me that this company is somehow able to accumulate money. What about debt though? Well, in 2013, they actually had no long-term debt, which was very impressive.
  • [00:24:32] And then in 2020, they have about two and a half billion. So not that much, actually. Now I will say that that long-term debt figure. It doesn't include, I noticed a few billion dollars in. Things like deferred revenue and lease obligations, things that they're going to have to pay, but debt is still debt.
  • [00:24:51] And the fact that they don't have a lot of it relative to their income or rather their sales and their cash balance is pretty great. I think that they have a pretty good cash position here. Now let's look at the cashflow. So income that tells us how much is being made from a profit perspective based on certain accounting rules.
  • [00:25:15] But the cashflow tells us how much money is actually moving into and out of the business. So, first let's look at the operating cashflow. This tells us how much money the business is actually making through its operating activities. So when it sells software, like how much money is actually flowing through the business in 2013, this was about.
  • [00:25:36] 730 or so million dollars. And then in 2020, this was over $4 billion, actually almost four and a half billion dollars. So a big increase in operating cashflow. And guess how fast that grew, 28% annually, the same growth rate as the revenue, which is very impressive. And this goes to show how the software as a service business model is incredibly powerful because you have so little.
  • [00:26:06] Capital expenditures relative to your, to your revenue, that a lot of it just falls to the bottom line. And if you can do it well and you can scale up fast, then you can have a pretty strong growth in your cashflow, not just your revenue. So that is pretty impressive to me. As far as the investing cashflow, they invested almost a billion dollars in 2013.
  • [00:26:33] That number increased to about 3 billion in 2020. Most of this was purchasing of securities, nothing, nothing too crazy here. And then as far as financing cashflow, they raise over 300 million in 2013 and then about 160 million in 2020. Again, some of this is, is long-term debt, but not too much of it.
  • [00:26:57] There's nothing too, too out of the ordinary here that I saw, as far as dividends go, the company doesn't pay any dividends, which not surprising. They're a high growth tech firm. And then if we look at the shares outstanding, remember this is always important because we don't want to get diluted too much to shareholders.
  • [00:27:16] And if possible, we'd actually want that share count to decrease over time, because that means our earnings per share figure is going to go up. So 2013. There were 600 million shares outstanding. And in 2020, there were 940 million shares. Outstanding. That's actually a pretty big increase, right? I mean, it increased by about a third.
  • [00:27:37] And if we were to do the calculation of how much annually that grew, that was over a six and a half percent annual growth rate in shares outstanding. And that's kind of concerning in most normal situations. I would be pretty concerned by that. But guess what the operating cashflow is growing at 28% annually, that's a lot of cash growth, right?
  • [00:27:59] So it doesn't bother me so much. I mean, looking at the net income, it doesn't look like this business produces a huge amount of cashflow just on the surface. If you just were to look at a PE ratio or something like that, but really it makes money. It makes a lot of money through this operating cashflow.
  • [00:28:16] We just have to look at other places. Within the financial statements. So that's just a tidbit for you there to think about. So we've covered the history, the business overview and the financials of Salesforce. Hopefully that gave you a great overview of what this business is like and helps you as an investor.
  • [00:28:38] Learn a little bit more about another company. Well, that'll be it for today's episode. Thank you so much for listening to the stock stories podcast. I love doing this. I love hearing from you. I love studying new companies and mental models. And if you have suggestions for the show, or you just want to say hi, or just want to hit me up, let me know.
  • [00:29:01] Talk to me on Instagram @stockstoryteller. And I'm also on Twitter also at stock storyteller. And I'll link those in the show notes. Thank you so much. And I'll see you next week.
  • [00:29:37] The information presented here on stock stories is for informational educational and entertainment purposes. Only you and you alone are responsible for your investment and financial decisions. Please consult an appropriate tax legal or financial advisor that analyze your specific situation in the context of your goals and circumstances.

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