Salesforce (NYSE: CRM) shares started getting crushed in November 2021, falling on the order of 50% between then and last month’s low. Now that the market’s bearish dust appears to be settling, though, investors are seeing this company is still on track for 20% sales growth this year, to be followed by another 18% top-line improvement next year. What’s not to like about this Dow Jones Industrial Average Constituent, particularly following its steep sell-off?
Before taking that plunge, though, take a breath, a step back, and a more scrutinizing look at your situation. Salesforce isn’t necessarily a bad stock to own. It may not be the best stock for you to step into right now, however.
An impressive company, but…
If you’re not familiar, Salesforce is one of the pioneers of the cloud computing arena, launching its online customer-management service even before “cloud” became a commonly used term. Salesforce.com debuted its web-based offering back in 1999 and has since evolved into a platform used by more than 150,000 enterprises in need of a way to make their salespeople and sales more efficient processes. The company’s offerings are deeper and wider than they were a little over 20 years ago, but customer management is still the heart of what it does.
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The company’s only scratched the surface of what it could be, though. As noted, revenue is projected to grow to the tune of 20% this year, yet as the customer relationship management (CRM) market’s leader, Salesforce is positioned to capture more than its fair share of the CRM market’s annualized average growth of 13.3% that Precedence Research sees taking shape through 2030. Not bad.
Owning a piece of Salesforce, however, still presents the problems that owning any individual technology growth stock does. That is, you’re always just one competitor’s unexpected development away from trouble, and subject to unnerving volatility while you’re hoping that never happens.
There’s a better way, especially if you’re not even completely sure about jumping into a new Salesforce position. That better way is buying into the entire Dow Jones Industrial Average that Salesforce is a part of anyway with a fund like the SPDR Dow Jones Industrial Average ETF Trust (NYSEMKT: DIA).
Define your ultimate goal
Boring? Maybe a little, but we don’t invest for entertainment. We invest to generate the best returns as realistically possible while taking on as little risk as possible. For most investors — and particularly for investors without a well-diversified portfolio — an index fund is a far wiser means of achieving this than owning an individual stock is.
Just look at the performance of the two prospects in question to see how this argument holds up. The Dow Jones Industrial Average ETF Trust is down for the year, but not nearly as much as Salesforce is. Indeed, the Dow has only fallen about half as far a CRM shares have since logging their high back in November. You may be mulling a move into the stock, but lots of investors’ confidence in Salesforce has been shaken to the core. Yours could suffer the same fate if the stock dishes out a similar setback again in the future.
Granted, Salesforce stock also outperformed the Dow Jones Industrial Average last year and the year before — by a country mile. Outsized gains like this are the key reason you’d choose the risk of individual stocks over a basket of them. If your portfolio currently includes at least a couple dozen other stocks spread out (fairly) evenly across all the major sectors, CRM’ dip is a reasonable, calculated risk.
Most of us just don’t have that sort of diversification in a portfolio built out of single stocks, though. It’s tough to find 25 to 30 solid equities you feel good enough about to buy in the first place; Keeping tabs on each of them is even tougher and more time-consuming.
It’s just a suggestion — not a commandment. No two investors’ situations are exactly alike. It’s possible your situation can justify taking on a risk like betting on one company in a competitive market rather than minimizing your risk by betting on a bunch of different blue chip stocks.
The fact that you’re reading this commentary, however, indicates you’re not entirely sure which of the two options makes the most sense for you at this time. That’s telling in and of itself. It’s telling you that your portfolio lacks the foundation of index-based funds and other ways of diversifying that need to be put in place first… before taking a shot on a clearly volatile tech stock.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Salesforce, Inc. The Motley Fool has a disclosure policy.