Salesforce Stock Undervalued Despite Strong Cash Flow Growth

Salesforce (CRM) stock is currently trading 36.2% below its two-year high, which was reached on December 4, 2024. Despite this decline, the company's free cash flow over the last twelve months stands at 7.8% of its market value, significantly higher than the 4.5% median for S&P 500 companies. This high yield suggests that the business is either undervalued or expected to shrink.

The company's cash flow is actually growing. Salesforce generated $15.2 billion in free cash flow over the last twelve months, up from $12.5 billion a year earlier. This growth is notable because the company's capital spending is relatively low, at just 4% of operating cash flow. Additionally, Salesforce's operating margin has improved to 21.5%, up from 13.0% three years ago, with free cash flow representing 34.5% of revenue.

Despite these positive indicators, Salesforce's stock price remains low, possibly due to concerns raised by management on the fiscal Q2 2027 call on August 26, 2026. Skeptics worried about customers cutting seats, leaving, or pushing prices down. However, the company has not reported customers leaving, and revenue grew 11.2% over the last twelve months. Management also noted that attrition is near its lowest level ever, and seats for its sales and service software and for Slack all grew from a year earlier.

Investors should watch the company's cash flow and debt levels when Salesforce reports fiscal Q3 2027. Management has forecasted free cash flow growth of about 4% to 5% for fiscal 2027, much slower than the 15.8% rise in fiscal 2026. Net debt stands at 1.8 times EBITDA, and a reduction below this level would indicate the company is managing its debt more easily. A raise in the free cash flow growth forecast above the current range would signal stronger financial performance.