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Motley Fool: Profitable relationships

Salesforce’s market share gains are helping to produce tremendous increases in revenue and cash flow. (Salesforce)
Salesforce’s market share gains are helping to produce tremendous increases in revenue and cash flow. (Salesforce)

There’s a fast-growing kind of software out there – specializing in customer relationship management (CRM) – and the dominant company in the business is (NYSE: CRM). Its systems help companies keep track of and manage their relationships and interactions with customers and potential customers – and analyze that data, too.

Shares of Salesforce have more than tripled in value during the past five years, and many analysts expect continued robust growth. Why? Well, the market for CRM software is expected to surge from a recent $72 billion to $123 billion by 2021. According to industry analyst IDC, Salesforce gained more market share than the rest of the 20 largest CRM suppliers combined in 2017.

The company’s market share gains are helping to produce tremendous increases in revenue and cash flow, with Salesforce’s revenue popping 25 percent over year-ago levels in the last quarter to $3 billion, along with a 25 percent gain in free cash flow, to $1.3 billion. Looking even further ahead, Salesforce is on pace to hit its goal of generating $21 billion to $23 billion in annual revenue by fiscal 2022.

Catalysts for further growth include Salesforce’s incorporation of artificial intelligence in its offerings and its recent acquisition of MuleSoft, which will expand its cloud computing capabilities. Long-term investors seeking growth should take a closer look at Salesforce. (The Motley Fool owns shares of and has recommended Salesforce.)

Ask the Fool

Q: Should I invest in “growth stocks” or “value stocks” – which is better? – G.G., Portland, Oregon

A: You don’t have to choose one or the other – some of the best stocks to invest in are both.

Growth stocks are tied to companies that are increasing their revenue and earnings relatively rapidly, while value stocks are tied to companies with market values significantly below what they seem to really be worth. If you find a company that’s growing at a solid clip and it seems to be undervalued, that’s a very appealing proposition, offering a good chance of stock price appreciation.

It’s best, overall, though, to favor undervalued stocks. Even if they grow slowly, they offer a margin of safety by not being overpriced.

Q: Are secondary offerings and subsequent offerings the same thing? – K.F., Muskegon, Michigan

A: Subsequent offerings are often called secondary offerings, but the two events are different.

When a company “goes public,” it issues stock in itself via an initial public offering (IPO) on the open market. It’s common for insiders or large investors to keep sizable ownership stakes in the company, with only a portion of shares sold in the IPO. If these big investors later sell some of their shares to the public, that’s a secondary offering, and the investors collect the sales proceeds, not the company.

A subsequent (or follow-on) offering happens if the company wants or needs to raise more money later (perhaps to pay down debt, finance operations or buy another company). It will create and sell new shares, increasing the number of shares outstanding and diluting the value of existing shares. That’s not great for existing shareholders.

My dumbest investment

Ugh. My dumbest investment was in an offshore drilling company that was recommended by a TV stock guru.

I bought into the stock when the price of a barrel of oil was still in triple digits. I kept adding as the price of oil continued to crash – hey! I’ll end up with a lower cost basis! I lost a lot of money. I’m keeping the shares as a reminder of how not to build up my portfolio.

I’ve learned a lot since that investment, as I’ve spent a lot of time reading The Motley Fool. Before, my IRA was managed by my broker and invested in “aggressive” mutual funds. Now I’m sticking with stock in high-quality companies. Before, I would buy more shares of sinking companies. Now I buy more shares of solidly performing companies – even if their prices are going up. Before, I’d panic when the stock market retreated. Now I get excited about sale prices. Before, my returns trailed the S&P 500. Now, I’ve been outperforming it. – C.B., Los Angeles

The Fool responds: It can be tempting to buy more shares of a falling stock, as it might seem like more of a bargain. But stocks often fall for good reasons. Always dig deeply into the situation before committing more money. Make sure that any problems you discover seem to be temporary, not permanent, ones.

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