• If you are wondering whether Salesforce at around US$179 per share is starting to look attractive again, the key question is how its current price lines up with underlying value.
• The stock is roughly flat over the past week, up about 0.5% over the last month, but is still down 29.4% year to date and down 34.9% over the past year, which has changed how many investors view its risk and return trade off.
• Recent headlines have focused on Salesforce as a major software provider in a sector where investor attention has shifted between high growth stories and more cash flow focused companies. This changing focus helps explain why the stock's longer term returns, including a 17.0% decline over three years and a 23.1% decline over five years, look very different to its shorter term moves.
• Salesforce currently has a valuation score of 5 out of 6. This reflects how many of our checks suggest the stock is undervalued. The rest of this article will walk through the key valuation approaches used to arrive at that score, and will also hint at a more complete way to think about value toward the end.

Approach 1: Salesforce Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow, or DCF, model estimates what a stock could be worth by projecting the cash the company may generate in the future and then discounting those amounts back to today.

For Salesforce, the model used is a 2 Stage Free Cash Flow to Equity approach. The latest twelve month free cash flow is about $14.3b. Analyst projections and subsequent extrapolations by Simply Wall St point to annual free cash flow of $19.8b by 2031, with a path of projected cash flows between 2026 and 2035 that are all above $14.1b in absolute terms.

These cash flows are discounted back to today using the DCF framework, which results in an estimated intrinsic value of about $349.29 per share. Compared with the recent share price of around $179, this implies the stock trades at a discount of roughly 48.7%, which highlights a sizeable difference between the market price and the DCF estimate.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Salesforce is undervalued by 48.7%. Track this in your watchlist or portfolio, or discover 46 more high quality undervalued stocks.

Approach 2: Salesforce Price vs Earnings

For a profitable company, the P/E ratio is a useful shorthand for how many dollars investors are currently paying for each dollar of earnings. It ties the share price directly to the bottom line, which is what ultimately supports long term returns.

What counts as a "normal" P/E depends on how quickly earnings are expected to grow and how risky those earnings are. Higher expected growth or lower perceived risk can justify a higher multiple, while slower growth or higher risk usually calls for a lower one.

Salesforce currently trades on a P/E of 19.65x. That sits below the Software industry average of about 29.98x and well below the peer average of 60.04x. Simply Wall St’s Fair Ratio for Salesforce is 32.36x. This Fair Ratio is a proprietary estimate of the multiple that would be reasonable given factors such as earnings growth, industry, profit margins, market cap and risk profile.

Compared with a simple peer or industry comparison, the Fair Ratio aims to be more tailored to Salesforce specifically, rather than assuming all software companies deserve the same multiple. Since the current P/E of 19.65x is below the Fair Ratio of 32.36x, the stock screens as undervalued on this metric.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your Salesforce Narrative

Earlier it was mentioned that there is an even better way to understand valuation. Narratives take that further by letting you attach a clear story about Salesforce, including your own fair value, revenue, earnings and margin assumptions, to a structured forecast that can be tracked and compared directly with the current share price.

On Simply Wall St’s Community page you can pick or build a Narrative, see the implied fair value from that story and compare it with today’s price to evaluate whether Salesforce appears expensive or cheap on your terms, then watch that view update automatically as new filings, earnings or news arrive.

For Salesforce, one investor might lean toward a higher fair value around US$385 per share with revenue growing about 12.3% and a future P/E near 35x, while another might sit closer to US$194 with revenue growing about 8.4% and a future P/E near 21x. Narratives make those differences transparent so you can see which story you find more reasonable and how the stock lines up against it right now.

Do you think there's more to the story for Salesforce? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.