Tech companies that were once cautious about in-person work are calling employees back to the office. Google wants workers to come in three days a week. So does Amazon. The move poses a challenge to business software stock valuations.
Take workplace chat provider Slack and its parent company Salesforce, the cloud software group. Salesforce bought Slack in late 2020 for $27.7bn, paying a 55 per cent premium for a business that it hoped would prove integral to the future of remote work and act as an interface for its software.
The move was unpopular with investors leery of Salesforce’s appetite for acquisition and aware that Microsoft’s competing services (which include video calls) undercut Slack. Salesforce’s share price has lost about a fifth of its value since the deal was announced, though this can also be attributed to rising interest rates souring sentiment towards high-growth tech stocks. Undeterred, Salesforce has integrated Slack into its services.
Salesforce is a software as a service (SaaS) pioneer. Its hunger to create an ever more comprehensive suite of services is intended to encourage more users to sign up and pay higher subscriptions. That strategy has supported revenue growth. An annual subscription rise of more than 20 per cent in the last fiscal year means Salesforce is expected to increase sales about a fifth in the current fiscal year to $32bn. Its goal of hitting $50bn in annual revenue by 2026 is in sight.
But growth via acquisitions means profits trail other software companies. Microsoft’s cash flow-to-revenue ratio was 33 per cent in its last fiscal year. Salesforce’s was just under 20 per cent.
The good news is that global IT spending is forecast to reach $4.4tn this year, up 4 per cent on 2021, according to Gartner. Cloud computing is expected to be in particular demand. Gartner predicts software spending will rise 10 per cent to almost $675bn.
Salesforce subscriptions will continue to grow. But if it hopes to match Microsoft’s suite of services, so will acquisitions.