Salesforce.com vs. Square: Which Stock is a Better Buy?

Salesforce.com Inc. (CRM) and Square, Inc. (SQ) are two well-known companies globally that are strategically positioned to capitalize on ongoing rapid business and consumer digitalization. CRM is a cloud-based software company focused on customer relationship management. SQ is primarily focused on the financial sector; it develops and delivers point-of-sale payments solutions in the United States and internationally.

Because several businesses adopted a work-from-home structure in response to the pandemic, and most people were forced to spend more at home also thanks to the pandemic, companies that focused on digital solutions to provide services gained significantly. Because this trend is likely here to stay, we think CRM and SQ should witness demand growth in the coming months.

While CRM has returned 263% over the past five years, SQ has gained 2587.5%. However, in terms of year-to-date performance, CRM is a clear winner with 5.2% returns versus SQ’s 4.6%. But which of these two stocks is a better pick now? Let's find out.

Latest Movements

CRM announced on February 2 that it is extending the expiration date from February 1 to February 5 regarding its solicitation of consents on behalf of Slack Technologies, Inc. (WORK), governing Slack’s $862,500,000 in aggregate principal amount of 0.50% Convertible Senior Notes due 2025.  On January 27, the company announced the availability of Vaccine Cloud, technology to help government agencies, healthcare organizations, businesses, nonprofits and educational institutions to deploy and manage their vaccine programs more rapidly, safely and efficiently. Several international agencies and healthcare providers, among others, are using CRM’s technology specifically for vaccine administration.

On January 26, Accenture plc (ACN) and CRM announced a plan to expand their alliance to help companies integrate sustainability into their businesses, meet growing customer and stakeholder expectations, and contribute to advancing the United Nations’ Sustainable Development Goals (SDGs). Sally Beauty Holdings, Inc. (SBH) partnered with the company in January to implement cloud-based enhancements to support the shopping experience for beauty enthusiasts and salon professionals.

SQ announced in December that in partnership with POWDR, which is an adventure lifestyle company, SQ’s platform now powers payments, e-commerce, and point of sale payments at nearly one  dozen renowned ski resorts across the U.S.  and Canada. In the words of Justin Sibley, co-President at POWDR, “POWDR chose to partner with Square because they help elevate the guest experience from enabling fast, secure, contactless payments to integrated online-ordering solutions.”

Also in December, SQ launched Shift Scheduling,  a new first-party scheduling feature that works seamlessly with SQ’s Team Management and Payroll offerings to create  robust, consolidated labor management solutions for employers. The company announced the availability of Square Appointments on Square Register, which is a point-of-sale solution specifically built for beauty and wellness sellers that now runs on the company’s hardware.

Recent Financial Results

CRM’s top line climbed more than 20% year-over-year to $5.24 billion for the fiscal third quarter ended October 31, 2020 driven by a growth in revenue across both segments.

CRM’s revenues from subscription and support, which accounted for 93.8% of its total revenue, increased 20% year-over-year to $5.09 billion, while revenues from professional services and other increased nearly 22% year-over-year. The company reported net income of $1.08 billion as compared to the loss in the third quarter of 2019. Its non-GAAP EPS increased 132% year-over-year to $1.74.

SQ’s revenue for the third quarter ended September 30, 2020 increased 139.6% year-over-year to $3.03 billion. It was driven primarily by the appreciation of Bitcoin. Bitcoin revenue has increased 1,001.8% year-over-year to $1.63 billion. The number of its average daily transacting active Cash App customers nearly doubled from the same period last year. Its net income has increased 24.2% year-over-year to $36.52 million, yielding EPS of $0.34, up 36% year-over-year.

Past and Expected Financial Performance

CRM’s revenue has increased at a CAGR of 26.7% over the past three  years. Analysts expect the company’s revenue to increase 17% for the quarter ending January 31, 2021, 18% for the quarter ending April 30, 2021 and 23.5% in 2021. CRM’s EPS is expected to grow 13.6% for the quarter ending January 31, 2021 and 55.2% in 2021.

In comparison, SQ’s revenue grew at a CAGR of 55.1% over the past three years. The market expects SQ’s revenue to increase 391.4% for the quarter ended December 31, 2020, 116.2% for the quarter ending March 31, 2021 and 36.6% in fiscal 2021. The company’s EPS is expected to grow 8.7% for the quarter ended December 31, 2020 and 51.3% in 2021.

Profitability

CRM’s trailing-12-month revenue is 2.65 times SQ’s $7.65 billion. Moreover, CRM is more profitable with a gross margin of 74.5% versus SQ’s 32.2%.

Also, CRM’s leverage free cash flow margin of 29.5% compares favorably with SQ’s negative values.

Valuation

In terms of forward P/E, SQ is currently trading at 300.15x, which is significantly more expensive than CRM, which is currently trading at 50.44x. SQ is more expensive both in terms of trailing-12-month P/S (13.01x versus 10.40x), and trailing-12-month EV/S (13.39x versus 10.41x).

In terms of trailing-12-month price/cash flow, SQ’s 318.79x is 533.3% higher than CRM’s 50.34x.

So, CRM is also the more affordable stock.

POWR Ratings

CRM has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. However, SQ has an overall rating of D which represents a Sell.

CRM has a grade of B for Growth, which is reflective of an  expected increase in its earnings. In comparison, SQ’s bleak outlook is reflected in its Growth Grade of C.

CRM has a superior position also in terms of Momentum. The stock’s higher returns over the past month have earned it  a B Grade. However, SQ has a C Grade for Momentum.

Moreover, of 60 stocks in the Software – Business industry, CRM is ranked #15. SQ is ranked #100 of 105 stocks in the Financial Services (Enterprise) industry.

Our POWR Ratings system has also rated both CRM and SQ for Value, Stability, Quality, and Sentiment. Click here to get all of CRM’s ratings. Also. click here to learn about the additional POWR Ratings for SQ.

Our POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

The Winner

CRM is clearly the better buy here based on its lower valuation and higher earnings growth potential. Even though the growth outlook for SQ is positive, the company faces strong competition from its peers, which could prove detrimental to  its growth path. Our research shows that the odds of success increase if one  bets on stocks with an Overall POWR Rating of Buy or Strong Buy.

Click Here to learn about other top-rated Software – Business stocks. And if you are curious about several other Buy rated stocks in the Financial Services (Enterprise) industry, you can access them here.

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CRM shares were trading at $235.75 per share on Wednesday afternoon, up $1.55 (+0.66%). Year-to-date, CRM has gained 5.94%, versus a 2.59% rise in the benchmark S&P 500 index during the same period.

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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