Analysis: CRM GOOGL FB AMZN

This morning, analysts at Pivotal upgraded Salesforce.com (CRM) to "Buy" from "Hold" while analysts Wedbush added the name to their "Best Ideas List" calling out, in addition to other factors, the acquisition of MuleSoft.

Perhaps most important given the constant calls for a recession we seem to hear on a daily basis, the analyst at Pivotal noted their view that while an economic downturn is not fully incorporated into their models, they believe marketing technologies such as Salesforce, would remain relatively resilient "given the predictable revenue streams and bookings made well in advance."

Per the Wedbush note, the analysts noted that in their talks with "cloud sales veterans from major vendors" the industrial professionals noted that they "see Mule providing a highly complementary sales motion via next-generation integration technology critical to IT in digital transformation." This aligns with our view that the prior acquisition of MuleSoft has proven highly synergistic as it has served to unlock data trapped on legacy platforms and make it usable on the Salesforce platform.

In addition to the company's dominant position in the sales automation market (estimated at over 40%), the analysts called out their belief that Salesforce will continue to expand its foothold in other areas via its Services Cloud offering (where the analysts estimate ~35% market share) and Marketing Cloud (estimated at ~17% market share) as it diversifies its presence into fields such as e-commerce via the prior acquisition of Demandware. Within the note, the analysts called out the following commentary from their vendor checks:

  • "The acquisition of MuleSoft was the right move by Salesforce." -- Partner
  • "The acquisition of MULE completes the CRM's vision for the '360 view of the customer,' allowing Salesforce to unify the disparate pieces of their customers' databases. The acquisition presents an opportunity for further Platform growth." -- Industry Contact
  • "Middleware and data is nothing without analytics. Having Einstein was critical." -- Partner
  • "MuleSoft also presents the opportunity for AppDev. They're able to address the market from this perspective as well, which is what makes Salesforce so hot right now." -- Industry Contact

Alphabet

Another name that saw favorable mention from the analysts at Pivotal is Alphabet (GOOGL) , which was also upgraded to "Buy" from "Hold" as it remains dominant in the digital advertisement space. Importantly, regarding competition on this front, the analysts noted, "data we see conveys that little is getting in the way of its position [in digital advertising] with either consumers or advertisers." Additionally, while there is some regulatory risk, with some fearing that Alphabet may be at risk of the same factors impacting Facebook (FB) , the analysts noted that they see "a real difference in that Google appears to be better managed."

We agree completely with this take on the differences in management and therefore continue to view GOOGL as one of our favorite plays in the tech sector thanks to its balance of growth and valuation, compounded by the avenues for growth provided by the company's dominance in artificial intelligence, which we continue to believe provides a significant competitive moat and will ultimately allow the company to increase its business (and revenue) diversity by expanding into other fields, something we are already seeing with Waymo (autonomous driving) and Verily (healthcare).

Amazon

Also seeing a positive mention from analysts at Pivotal was Amazon (AMZN) , which the firm initiated with a "Buy" rating stating "despite its current massive size, we see Amazon's opportunities as mostly unconstrained based on a successful track record of capitalizing on consumer and IT department spending." We couldn't agree more as we continue to view Amazon's Flywheel as a key factor allowing the various components of Amazon's business segments to power and enhance the others.

We can clearly see this in action when we look at the company's e-commerce component as the platform allows Amazon to offer merchants competitive digital advertisements that targets buyers at the point of sale, thereby powering the rapidly growing ad business. We believe it is this Flywheel, compounded by the company's significant logistical capabilities, that will allow it to continue diversifying into new industries such as health care and potentially disrupt the shipping space as it looks to build out its own air delivery network.

Lastly, there is of course AWS, which, similar to the dynamic at Salesforce, benefits from the secular shift toward cloud computing. Recall, this is a trend we see as being resilient against a potential economic slowdown as companies, via a shift to the cloud, can convert fixed costs to variable ones and eliminate the need for extensive investments and long lead times associated with building out their own data centers, two strong reasons to continue investing on this front despite any macroeconomic pressures.

Backing this view, we would also note that the analysts at Pivotal called out that "as of the end of 3Q18, the company had a $17.8bn revenue backlog associated with AWS for contracts whose terms exceed one year and which were not otherwise reflected in its financial statements, with an average contract life of 3.5 years (implying ~$5bn of revenues to be generated each of the next 3.5 years from sales activities which were already performed). Notably, the $17.8bn figure was up from $16.0bn in 2Q18 and $12.4bn in 1Q18."

Clearly there is plenty of room for continued growth in this high-margin business going forward.

Action Alerts PLUS, which Cramer manages as a charitable trust, is long CRM, GOOGL, FB and AMZN.