Wall Street is beginning to cool off to Salesforce's business strategy, as its management has been doing a poor job of managing other people's money. Salesforce has been delivering growth but destroying value.

There was a time when Wall Street was warming up to Salesforce's business strategy of acquiring and integrating other companies to deliver solid and consistent sales growth quarters. That was over the last decade when the company's shares soared from $16 at the beginning to $270 by the end of the decade.

Salesforce continues to deliver substantial growth numbers, but Wall Street has yet to be impressed. For instance, in the first quarter of 2023, Salesforce had an 11% annual revenue increase in a challenging macroeconomic environment. Management credited the company's strategy for these results.

"Q1 represented another strong step forward as we accelerate our transformation and profitable growth strategy," said Amy Weaver, President and CFO of Salesforce. "Our team delivered another double-digit growth quarter on the top and bottom line as we help customers increase productivity, drive efficiency, and become AI-first companies."

Yet its shares sold off more than 6% following the release of these numbers, trading close to 20% below where they were trading three years ago. The problem with Salesforce's sales growth strategy is that it relies on acquiring and integrating other companies rather than developing new products and services in-house.

That's an expensive strategy as acquisition targets often become the subject of bidding wars, which raise the acquisition price. As a result, it transfers value of the stockholders of the acquirer to the stockholders of the acquired.

Companies like Cisco Systems and General Electric that followed this strategy ended up encountering this problem, and so is Salesforce.com. For instance, Salesforce's acquisition price tag rose from a few hundred million for Buddy Media, Quip, and Krux to several billion for MuleSoft, Tableau, and Slack.

Higher acquisition prices, in turn, raise the cost of capital while diminishing its return. Ultimately, these acquisitions destroy rather than create value for capital holders, as measured by economic profit or value added (EVA).

EVA is the difference between the return on invested capital (ROIC) and the weighted average cost of capital (WACC), which economists call "normal profit," the return investors can make by investing their money in major equity and debt indexes.

As a result, EVA measures how effectively publicly traded companies manage other people's money. A positive EVA means that a company creates value, as it does a great job managing other people's money. By contrast, a negative economic profit means the company destroys value as it grows. Again, this is because it invests other people's money poorly.

Over the last decade, Salesforce's EVA has remained decisively negative, according to Gurufocus.com. However, closer scrutiny of the two components of Salesforce's EVA reveals that the company needs to pay more to raise capital and earn more or no return.

As of June 1, Salesforce had an ROIC of 0.66% and a WACC of 8.06%, yielding an EVA of 7.40%, meaning that capital in its management is ineffective in investing other people's money.

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