The pandemic accelerated the corporate world’s digital transformation.

Enterprise cloud computing solution provider (CRM) benefitted from the adoption. However, shares of CRM have fallen 30% from early November peaks. Valuation was a concern as investors headed for the hills in a rising rate environment.

CRM saw additional headwinds around fears that orders were being pulled forward, cannibalizing future sales growth. The acquisition of Slack and MuleSoft were viewed as desperate, ineffective moves by a company grasping for growth.

CRM reported its Q4 numbers on Tuesday and we wanted to see if the bearish argument gained momentum or if this is an oversold tech candidate.

CRM reported Q4 earnings of $0.84 per share, $0.09 better than expectations. Revenues increased 26% year over year (y/y) to $7.33 billion, slightly outpacing expectations. This was a slight deceleration from 27% growth in the third quarter. On an organic basis, CRM revenues grew approximately 20.6% y/y compared to 19% in the prior quarter. FY22 revenue was $26.5 billion, a 25% y/y increase. These are steady growth numbers and impressive given the size of CRM.

The company’s Revenue Performance Obligations (RPO), a promise to provide distinct goods or services to customers, was $43.7 billion at the end of the quarter. The Current RPO (CRPO), a measure of RPO over the next 12 months, increased 22% y/y to $22 billion against expectations of a 19% jump. These numbers provide a long runway and do not suggest demand diminished.

Progress in enterprise continued with 7-figure deals signed increasing 34% y/y and 8-figure deals more than doubling. The hybrid remote environment sees enterprise companies green lighting larger digital projects, a major tailwind for Salesforce. Larger deals are the holy grail for all software players.

CRM reported broad strength across all regions with 23% growth in the Americas, 40% growth in EMEA, and 28% in APAC. The company has no material business in Russia or Ukraine.

Sales cloud and CRPO results were very strong though marketing cloud missed expectations. Sales Cloud and Service Cloud are both $6 billion businesses that grew 17% and 18% in Q4, respectively.

Slack continues to exceed expectations. Revenue was $312 million, well ahead of expectations of $285 million. It announced key wins with Carvana (CVNA) and Netflix (NFLX). The number of customers spending $100K+ with Slack increased 46% y/y. Slack represented 4.5% of the CRPO growth compared to 4% in Q3.

CRM is proving to the street that the controversial Slack acquisition is starting to pay dividends. The company is seeing synergies in both its value proposition from its product and the distribution environment.

Operating margin was 15% in Q4 and 18.7% for FY22. CRM is forecasting operating margins to expand to 20% in 2023. Free cash flow in 2022 hit a record $6 billion, up 25% y/y which far exceeded the company’s goals.

CRM raised its Q1 revenue guidance by $130 million to $7.37-7.38 billion, approximately 24% y/y growth. A deceleration from Q4 but the quarter faces difficult comps. Guidance assumes a $330 million contribution from Slack. FY23 sales expectations were increased by $300 million to $32.0-32.1 billion or approximately 21% growth.

CRM guided CRPO growth of 21% in the April quarter, a slight deceleration from the 22% posted in Q4. But in line with seasonal trends.

The company reiterated FY23 operating margin expectations of 20%. Representing an expansion of 130 bps. This includes 100-125 bps of headwind from acquisitions. Operating cash flow is expected to increase 21-22% y/y.

On its conference call, analysts stated that the Q1 outlook was better than expected as the pull-through argument gained steam. CRM stated that the reality is that over the past two years the company has seen incredible demand which is linked to the digital transformations that clients are going through. CRM noted that it does not matter where they are located or what industry the client operates in, they understand that they will not have a future if they do not adapt.

The results highlight broad-based demand for its solutions and better than expected performance from Slack. The numbers put the demand pull-forward conversation to rest as Q4 and the FY23 outlook highlight the digital transformation.

Continued operating margin expansion in 2023 and further integration of Slack by existing CRM customers will help improve valuations on an earnings basis.

The risk/reward in CRM is attractive as the stock is oversold relative to its growth profile. The transition to digital work from home environments provides significant momentum to CRM which is viewed by many as one of the strongest SaaS names.

The stock recently tested and held its 200-weekly moving average ($191). Shares saw a brief pop to $217 following earnings, but it would give up those gains. These levels will set up as key areas for investors to watch.

Investors are not convinced that they should come off the sidelines. But there does appear to be some seller exhaustion. This usually sets up for a choppy trading environment. This is a good area to slowly accumulate a position until we see sentiment soften.