Salesforce is reportedly back in talks to acquire data-management software maker Informatica. The potential deal could significantly impact Salesforce stock and enhance the company’s artificial intelligence strategy.
Importance of Informatica’s Software
Informatica’s data management software assists companies in collecting and cleaning their proprietary data, which can then be utilized to build and train AI models. The rise of generative AI has led companies to prefer using their own data over third-party datasets.
Analyst Insights
RBC Capital Markets analyst Rishi Jaluria highlights that many software companies are recognizing the necessity of accessing large amounts of high-quality internal datasets for training and testing purposes. Jaluria stated, "With the rise of GenAI, many software companies are realizing the importance of getting their estate in order."
Acquisition Considerations
In April 2024, Salesforce was reportedly considering acquiring Informatica at a price between $34.50 and $38 per share. This consideration followed an earlier approach to Microsoft Corp. regarding its Power Apps unit, which Salesforce ultimately decided against.
The Wall Street Journal reported that Salesforce is revisiting the purchase of Informatica after previously pulling back from negotiations due to investor skepticism about the acquisition’s value for shareholders.
Competitive Landscape
Tech giants such as Amazon.com Inc., Apple Inc., Alphabet subsidiary Google LLC, and Meta Platforms Inc. are competing to develop new technologies using Generative Artificial Intelligence (GenAI). Analysts anticipate that Informatica’s cloud business will achieve an annual recurring revenue (ARR) growth of around 25% year-over-year, reaching approximately $1 billion this year.
Valuation Insights
Bora from JPMorgan Chase & Co. suggests that the ARR growth rate could translate into a valuation of roughly 6-7x based on historical multiples paid by public SaaS peers. Assuming the rest of the business is valued similarly low (~1-2x), this indicates an offer price range of $20-$26 per share.
Challenges Faced by Informatica
Informatica has encountered "execution challenges" due to recent changes in the data landscape, leading to increased customer churn rates during Q3 FY24 compared to prior quarters. Additionally, sales force productivity has declined sequentially despite higher headcount additions, indicating potential execution issues primarily linked to integration efforts following recent acquisitions.
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