BofA: Salesforce (CRM.US) is poised to become the next quality GARP stock, maintaining a "Buy" rating.

Bank of America released a research report, maintaining its "buy" rating on Salesforce (CRM.US) with a target price of $400. The bank noted that Salesforce is likely to become the next quality growth at a reasonable price (GARP) stock, with revenue growth expected to remain in the low double digits while achieving a 50-100 basis points of margin expansion through ongoing sales/marketing leverage.

Analysts Brad Sills and Carly Liu of Bank of America in the report noted that despite the macroeconomic uncertainties that may delay the bank's revenue growth target for Salesforce to 2026 fiscal year, based on the strong performance of its data cloud business (a leading indicator of its AI agent system Agentforce, annual recurring revenue reached $900 million in the fourth quarter, up 120% YoY), Agentforce is still expected to contribute an additional 2 percentage points of growth in an optimistic scenario by the second half of 2025 fiscal year.

Moreover, the bank predicted that in a reasonable optimistic scenario, Salesforce's free cash flow would reach $28.2 billion by 2031 fiscal year (with a 5-year CAGR of 15%), and its free cash flow margin would reach 38.8%, expanding by 100 basis points on average every year starting from 2025 fiscal year.

The bank's analysts said that the key source of margin improvement is sales and marketing. Currently, Salesforce's sales and marketing expenses account for 29.7% of total revenue, and its sales and marketing expense ratio (SMIR ratio) is 4.2 times, far higher than the average of 22% and 2.1 times for large software companies. Through optimizing the structure of sales team, strengthening cooperation with partners, improving product packaging, and internal use of Agentforce, Salesforce is expected to gradually reduce the proportion of sales and marketing expenses in the next few years, thus improving its margin.

However, the bank noted that although Salesforce's R&D expense is currently 11.6%, lower than the industry average of 14.9%, the leverage effect of R&D expense is expected to be negative as Agentforce continues to expand in the future, partially offsetting the above sales and marketing leverage.