Given its better valuation, we believe that Salesforce stock (NYSE: CRM) is currently a better pick over its peer, Oracle stock. CRM stock trades at 9.5x trailing revenues, versus 9.8x for ORCL. Although Oracle is more profitable, Salesforce has seen better revenue growth and it offers lower financial risk. There is more to the comparison, and in the sections below, we discuss why we think CRM will outperform ORCL in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation.
ORCL stock has outperformed CRM stock in the last three years
ORCL stock has seen strong gains of 225% from levels of $60 in early January 2021 to around $195 now, vs. an increase of about 65% for CRM stock from $220 to $360. This compares with roughly 60% gains for the S&P 500 over this four-year period. Admirably, ORCL stock has outperformed the broader market in each of the last four years. Returns for the stock were 37% in 2021, -5% in 2022, 31% in 2023, and 85% so far in 2024. CRM stock hasn’t been that consistent, with returns of 14% in 2021, -48% in 2022, 98% in 2023, and 38% this year – indicating that CRM underperformed the S&P in 2021 and 2022.
In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including META, COMM, and AAPL, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
Salesforce’s revenue growth is better than Oracle’s
Salesforce has seen its revenue rise at an average annual rate of 18.1% from $21.3 billion in 2021 to $34.9 billion in 2024 (fiscal ends in January). On the other hand, Oracle’s average revenue growth rate of 9.5% from $40.5 billion in 2021 to $53 billion in 2024 (fiscal ends in May) over this period has been comparatively slower.
Salesforce’s revenue growth lately has been driven by an increase in subscription and support sales, amid increased demand for its cloud-based offerings, including – Sales Cloud, Service Cloud, and Marketing Cloud. Salesforce aims to grow its revenues by leveraging the technological revolution that includes the demand for artificial intelligence and machine learning. The company is benefiting from its AI system – Agentforce. The company continues to introduce AI capabilities across its offerings, which is resulting in increased adoption.
Oracle’s revenue growth is also being driven by increased consumption of its cloud offerings. Oracle is benefiting from its success with generative AI workloads. In fact, it expects its revenue to double in five years, as more on-site database customers move to the cloud.
Looking forward, both Salesforce and Oracle are expected to benefit from the rising demand for cloud and AI. Oracle is investing in AI infrastructure and has partnered with key players, including AWS, Microsoft, and Google. We expect both companies to see their sales rise at a low double-digit average annual growth rate over the next three years.
But, Oracle is more profitable
Looking at profitability, Oracle’s adjusted net income margin has declined from 34.9% in 2021 to 29.7% in 2024, while that for Salesforce has risen from 21.6% to 23.2% over this period. Now, Oracle’s 30.3% adjusted net income margin for the last twelve-month period fares much better than 25.5% for Salesforce.
What about financial risk?
From a financial risk perspective, Salesforce seems to have an edge over Oracle. Its 3% debt as a percentage of equity is much lower than 16% for Oracle, while its 14% cash a percentage of assets is higher than 8% for the latter. This implies that Salesforce has a better debt position and more cash cushion.
The verdict – CRM’s a winner!
We see that Salesforce has seen better revenue growth and it offers lower financial risk. On the other hand, Oracle is more profitable. Now, looking at prospects, we believe CRM is the better choice of the two. At its current levels of $360, CRM stock is trading at 37x its trailing adjusted earnings of $9.70 per share, compared to the stock’s average P/E ratio of 43x over the last four years. In comparison, at its current levels of around $190, ORCL stock trades at 32x its trailing adjusted earnings of $5.77 per share, versus the stock’s average P/E ratio of 22x over the last four years.
We think that an upward revision in valuation multiple for both stocks is warranted, given the rising AI-based cloud demand. ORCL stock, trading at a valuation multiple much higher than its historical average, while CRM stock trading at a multiple lower than historical average, doesn’t make sense in our view. We think this gap will narrow in favor of CRM. While both stocks may offer robust gains in the long term, if one has to pick, we believe CRM is a better choice.
While CRM may outperform ORCL in the next three years, it is helpful to see how Salesforce’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
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