Investors are increasingly optimistic about Salesforce Inc. (NYSE:CRM), with expectations that its upcoming quarterly earnings report will reveal strong operating and free cash flow (FCF). With robust growth in FCF, Salesforce stock is poised to rise significantly, leading analysts to predict a possible 30% increase in stock value, potentially reaching $448 per share. As Salesforce continues to expand its cash flow margins, CRM stock may present a compelling opportunity for long-term investors.
Salesforce Stock’s Cash Flow Performance
Salesforce stock closed at $343.31 on November 12, up from a low of $243.97 in early September. This upward trend is attributed to Salesforce’s impressive cash flow results, specifically its free cash flow. In the previous quarter, ending July 31, 2024, Salesforce generated $890 million in operating cash flow (OCF) and $760 million in free cash flow (FCF). FCF, calculated by deducting capital expenditure from OCF, reflects the company’s ability to generate cash for reinvestment or shareholder returns.
With a 20% year-over-year growth in FCF, Salesforce achieved an FCF margin of 8.14% on its quarterly revenue of $9.33 billion. Looking at the last 12 months (LTM), Salesforce’s FCF was an impressive $11.46 billion, translating to an FCF margin of 31.4% based on LTM sales of $36.465 billion.
Future Free Cash Flow Projections
Salesforce management projects a 23% to 25% increase in operating cash flow for fiscal 2024, which ends on January 31, 2024. Based on last year’s OCF of $10.234 billion, the projection suggests Salesforce will achieve approximately $12.69 billion in OCF. After accounting for an estimated $1.2 billion in capital expenditures, this implies a forecasted FCF of $11.49 billion, representing around 30.3% of the anticipated revenue of $37.87 billion for the year.
Further growth is projected for 2025, with analysts forecasting $41.29 billion in sales, an increase of 9% year-over-year. If Salesforce maintains an FCF margin of 31%, the company’s FCF could reach $12.8 billion. This upward trajectory signals a potential increase in Salesforce stock value as the company strengthens its cash flow position.
Target Valuation and Stock Price
A potential FCF yield valuation model places Salesforce’s stock value at a higher price. If the market applies a 3.33% FCF yield valuation (or 30 times FCF), Salesforce’s market cap could reach $384 billion, driven by the projected $12.8 billion FCF. This equates to an estimated stock price of $448.36 per share, representing a 30% upside from the current price.
Strategic Options: Selling Short Put Options
One strategy to capitalize on Salesforce stock’s growth is through shorting out-of-the-money (OTM) put options. This allows investors to set a lower buy-in price for CRM stock while receiving premium income. For example, the Dec. 6 expiration $325 strike price put option is trading at a bid premium of $6.85, giving short-sellers a potential yield of 2.1% on the capital required to back the option ($325 per share).
An investor selling this put would need to secure $32,500 in buying power or cash for one contract, immediately earning $685 in premium income. This results in a 2.1% yield for the investor, with the breakeven price lowered to $318.25 if CRM stock were to decline over the next few weeks.
Calculating Short Put Yield and Downside Protection
With CRM’s current stock price, this short put strategy offers protection, as the breakeven price provides over 7% downside buffer. Additionally, if CRM stock remains stable, the potential to repeat this strategy could yield an annualized return of around 8.4%.
By leveraging short put options, investors not only secure income but also gain a favorable entry point into Salesforce stock, benefiting from downside protection and potential future gains.
Conclusion: Upside Potential in Salesforce Stock
With robust FCF growth and favorable market conditions, Salesforce stock appears poised for further upside. As CRM continues to deliver strong financial results and improve its free cash flow margins, it remains an attractive investment. Shorting OTM put options with near-term expiration dates can be an effective strategy for investors seeking exposure to Salesforce stock with a lower initial investment, enabling them to capitalize on the company’s continued success and cash flow growth potential.
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