Salesforce Inc (NYSE:CRM, ETR:FOO) is emerging as the next Growth at a Reasonable Price (GARP) stock, according to analysts at Bank of America who see the company's focus on improving sales and marketing efficiency as a primary driver of margin leverage.
“We continue to believe that Salesforce is emerging as the next quality GARP stock with enduring low-double-digit top-line growth and steady margin expansion of 50 to 100 basis points from ongoing sales/marketing leverage,” the bank’s analysts wrote in a note to clients.
Salesforce’s sales and marketing expense currently stands at 29.7% of total revenue, with a Sales and Marketing to Incremental Revenue (SMIR) ratio of 4.2x compared to a peer average of 2.1x.
The analysts believe there is significant room for improvement through strategies such as adjusting account executive ratios, leveraging partnerships, optimizing product packaging, and expanding internal use of its Agentforce platform.
While continued investment in Agentforce and research and development is expected to offset some of these gains, the analysts still forecast a strong 15% compound annual growth rate in free cash flow over the next five years.
This outlook suggests Salesforce’s free cash flow could reach $28.2 billion by fiscal year 2031, representing a 38.8% margin.
The analysts in January outlined the case for revenue growth acceleration of 12% to 13%, up from 10% currently.
They see this target being pushed back to fiscal 2026 amid the growing risk of a tariff-induced macroeconomic slowdown.
“However, we continue to believe that Agentforce could represent an incremental 2% points of growth in an upside case by the second half of fiscal year 2025 given Data Cloud traction, a leading indicator for Agentforce,” they wrote.
The analysts reiterated their ‘Buy’ rating on Salesforce and awarded it a $400 price target.
Shares of Salesforce traded hands at about $278 in the early afternoon on Tuesday.