Microsoft would have to pay up for Salesforce growth

SAN FRANCISCO— If Microsoft CEO Satya Nadella is looking to acquire more growth in its cloud-based business, he could find it with reasonable certainty by buying Salesforce.com, the pioneer of selling software over the Internet.

But with investors bidding up Salesforce’s shares CRM to a new high in the wake of its latest earnings report, such a deal looks to be expensive at current valuations.

Salesforce, the San Francisco-based seller of cloud-based applications for customer tracking and marketing, late Wednesday largely re-iterated its revenue guidance for the next 15 months.

Helped in part by a spate of its own acquisitions and the broader shift to cloud computing, Salesforce is promising Wall Street 23% top-line growth for its current fiscal year and 21% for the year ending in January, 2017.

That far outpaces the expected near-term growth of the much-larger Microsoft.

Analysts expect  Microsoft's revenue to be flat for the fiscal year ending next June and then rise 6% in its 2017 fiscal year.

Initial enthusiasm about the Salesforce results and forecast late Wednesday sent its valuation above $51 billion for the first time. Shares rallied 4% Thursday, to $80.64.

The stock has risen more than 30% this year as CEO Marc Benioff has continued to find growth in Salesforce’s primary market, while entering new markets such as social-media marketing and analytics software.

The company is also layering high-margin services on top of those sales.

The bid for the company’s shares also hasn’t been hurt by talk that Nadella could be interested in acquiring the smaller Salesforce.

Microsoft is looking to boost its cloud business as a way to offset the slowdown in sales of its franchise business software products, Office and Windows.

Microsoft profit lifted by Cloud, Office

Investors have responded bullishly to Nadella’s plan since he took the reins early last year and have pushed up Microsoft shares 15% this year.

With a valuation of $430 billion, the company is worth about 8.5 times that of Salesforce, so Nadella could ask his shareholders to foot part of the bill for a Salesforce acquisition with equity.

But a deal that includes equity would be dilutive to Microsoft earnings in the short run, because Salesforce operates far less profitably.

(Despite its strong revenue growth this year, it reported a net loss of $21.9 million for the nine months ending in October.)

So any such deal could dampen enthusiasm for Microsoft shares, even as acquiring more growth should draw in growth investors and boost the stock price.

With its cash stockpile surpassing $100 billion, Microsoft could pull off such a deal without diluting its share count.

But that wouldn’t sit well with income investors who’d rather see that cash used for dividends.

That's the financial calculus Nadella faces.

Unless Salesforce shares stumble next year on an earnings miss, Microsoft will more likely be viewing the company as a rival, not a subsidiary, into 2017.

John Shinal has covered tech and financial markets for more than 15 years at Bloomberg, BusinessWeek,The San Francisco Chronicle, Dow Jones MarketWatch, Wall Street Journal Digital Network and others. Follow him on Twitter: @johnshinal.