Salesforce.com: Pricey and Coming Down Fast

The first casualty of a crash is innocence.  Salesforce.com (CRM) has been in a freefall, the stock is down about 47% YTD and 57% from the peak in June, but it is still trading at a ridiculous multiple of 112 P/E (4 x Google (GOOG) and 5 x Apple (AAPL)), 26X EV to EBITDA (2 x Google and 2.3 x Apple) and, even using the analysts surreal “pre recession” forecasts, it trades at a 1.5 PEG (with Google and Apple both at 0.7).

Suffice it to say that I still see a lot of room to fall.  Amidst a universe of 1330 companies listed in US exchanges with market caps over 1 billion, Salesforce.com is amongst the 5 highest P/Es. 

The company, in spite of its hyped rhetoric, is still just a one trick pony; it only competes in the Customer Relationship Management (“CRM”) applications space. CRM is a crowded market with about $7 billion in sales globally, their strong competitors are companies such as SAP (SAP), Oracle (ORCL), Microsoft (MSFT) and Sage; Salesforce is not even a leader in this segment, has a market share of only 10-15% and is #3 or four. 

The company’s other main initiative, called “the force”, is “a platform as a service”.  Now, I confess that I’m not clever enough to know for sure what this is; I believe it is a development tool that allows you to develop customizable applications in the “as a service” format offered by the company.  The main problem is that software development tools have never been particularly profitable. The company’s CEO conceded recently in an interview that “platform as a service needs a decade to cook” (sic.).  Translation: form an investor's perspective, it is worthless. 

The CFO has admitted recently that they expect a foreign exchange hit form the appreciation of the USD and also that pricing softness is likely ahead. 

Considering this is the tech sector, it is impressive that some people never seem to learn the lesson. 14 analysts recommend a buy on the stock with four recommending a sell.  Thomas Ernst with Deutsche Bank drew some chuckles yesterday by revising the target price downwards from $98 to $80 (the stock is at $32!). I would love to understand the rationale why he thinks that after a 55% fall in the last three months, from its peak at $75, in a global recessive environment, the stock is going to make a new high.

More concerningly, names like Fidelity, TCW, Sands Capital, Barclays, AXA, have significant stakes in the company. How will they explain to their investors (pension funds among them) how they have exercised their fiduciary duties in keeping this investment at these price levels? 

This is a case where they, rather than listening to the CEO’s hype and drinking the Kool-Aid, should have watched what he did - sell more than $200 million shares of his shares since 2006. 

Disclosure: Author holds a short position in CRM

Comments

[The Market ...:]

All I can say is "Amen"

2008 Oct 17 10:04 AM

[ikfhoo:]

The stock analysis at those multiples is hard to argue with but there are a couple things I take exception with.

CRM may be the main product but if you have looked at their portfolio lately you will see they have quite a few applications and I assume more will be announced next month at their user conference, so far from a one trick-pony.

Not understanding what Force.com is but still dissing it is a dis-service. They are not selling a tool, they are selling a service. The tools are free. Underneath all the applications is a platform, which they have now exposed and sell as a product (service) call Force.com.

This is about a complete change in paradigm of development. Moving from IT building applications on on-premise servers to running them on the cloud. The issue here is whether SFDC can attract enough customers to build applications this way on their cloud. This explains the 10 year comment to go from new to mainstream. BTW - I believe Java is about 10 years old, so that should provide some perspective.

So while this may be worthless to a short-term "short" to a long term "investor" it's called getting in early. However, I agree they may want to wait until the stock comes down first.

2008 Oct 17 01:56 PM

[Charlie Bottle:]

Ikfhoo,

Thank you for your comment. I'm an investor not a technologist and (though not particullarly smart), I'm pretty good at smelling rats. Whenever I hear the word "paradigm change", I start sharpening the knife. Not that I am complaining, it provides me with unique opportunites for profit through shorting as long as you time it well.

Unwittingly, your comment realy bollsters my point - look at Java after 10 years...where did it get Sun? Absolutelly nowhere. How much should "Force" be worth to an investor? Absolutelly nothing.

2008 Oct 17 06:16 PM

[Nicky:]

Poor article from someone who shows little understanding of CRM's business, yet trades the stock. People still love casinos and second guessing.

2008 Oct 17 06:59 PM

[AmesTiedeman:]

This can easily be a sub 10 stock.

2008 Oct 18 10:54 AM

[Charlie Bottle:]

The revolution will not be televised, will not be televised,
will not be televised, will not be televised.
The revolution will be no re-run brothers;
The revolution will be live.

2008 Oct 18 12:08 PM

[icebreaker:]

this is a $5.oo dollar stock masquarading as a $30.00 dollar stock.

2008 Oct 18 12:19 PM

[FourBrane:]

SalesForce.com has been lifted by the fad for cloud computing. No largish company bets its business on off-the-shelf solutions, let alone solutions hosted "somewhere." What differentiates me from my competitors when they can rent the same business system I'm using? How can I know my data is secure? Who do I call when the site's down or there's a bug?
SalesForce is a model that might be attractive to a little company which can't afford the rupees to contract an Indian programmer and has an owner who believes pretty screens can make salesmen sell better (hah-hah-hah-hah). If they are lucky, it's a formula for "getting by," but never getting big.
Some years ago I looked into developing on salesforce's platform, but just couldn't justify the time and effort. Not only was I going to have to originate the product, but I'd have to sell it to. If I can sell, I can host, so what did I need them for?
I wouldn't buy this stock at $5, $2, or $1. I'll sell it all day at $30 though.

2008 Oct 18 02:15 PM

[Charlie Bottle:]

My previous posting was for buylowsellhigh (I hope he got it).

Nicky, thank you for your comment. I think you may underestimate how much good Investing has to do with common sense and often casual observations which give you na hedge. I think it was Barton Biggs who said that specialists in a filed often undeperfom non specialists because often the odds tend to be with the simple and ovious outcome. Experts ofetn tned to have pet theories and look at complex webs of factors and get lost in it. I'm certainly not a specialist in CRM but am reasonably well informed and made a good faith effort to lay out my case based on facts and figures which I have provided here.

You on the other end, provided absolutelly no basis for your statement that my article is poor and that I do not understand the business, would you please explain why you feel that way?

2008 Oct 18 04:43 PM

[salesforced:]

I am in IT and have been using salesforce for about a year. Technically it is a wonderful product. It comes with a database and screens already built and you can add custom fields to fit your needs. We had it up and running in a month. It also allowed the business departments to go right around our IT department. As a company we are still trying to figure out where the responsibilities lie. But the heavy lifting is when the IT group must load and integrate Salesforce with the existing systems. The Force allows clients and partner software companies to write custom applications using the Saleforce database and screens. I worry that this is like the Java language Sun created- nice but no profit. I also wonder if this is like the Japanese automakers in the 80's. Be cheap now to get market share, then raise fees when customers are hooked. In a way it is like outsourcing. You are making a long term commitement / partnership when you use Salesforce. They need to stay competitive in their pricing.

2008 Oct 21 06:13 AM

[salesforced:]

One difference between Java and Salesforce. Java was distributed for free, there were no licensing fees and Sun had no control over it's use. Salesforce is a platform - the data resides in their database and all third party apps must go through it. Salesforce is more like Windows than Java. Right now Salesforce is not charging partners a lot in order to grow the application library. Once they are established, Salesforce might change it's licensing model to collect a per user fee from partner applications. The key again is competitors.

2008 Oct 21 06:21 AM

[GreyHairedF...:]

Not so many years ago, data was entered using 'punch cards.' All database updates would occur at the end of business day (when the punch cards were processed). Information retrieved from the database wasn't 'real-time' it was only as current as the previous night's punch-card run. In other words you wouldn't be able to see today's data until tomorrow.

A company named Walker Interactive "changed the paradigm." After Walker introduced 'Interactive database updates' (I.e.after you hit the ENTER key, your data was immediately available to other users.) nobody would accept anything less.

Larry Ellison hired Jeff Walker (the founder of Walker Interactive) to build Oracle's application division. (Walker also served as Oracle's CFO and Marketing VP.)

At Walker Interactive, Jeff Walker "changed the paradigm." He changed our expectations about our ability to timely access our company's data. Now we accept nothing less.

Marc Benioff has 'changed the paradigm' yet again.

Starting a software company rooted in force.com now takes only a bit more tech savvy than selling stuff on Ebay. Force.com application-developers will proliferate because it is easy and free to develop on force.com. The development time invested is minimal and if nobody buys your application on the application exchange - well, you've invested nothing more than your time. No VC money, no recruiting, no leasing of equipment or buildings, no more multiple layers of software licenses, etc.

Software companies stuck in the traditional development model simply won't be able to compete with force.com companies that risk nothing until they have a customer to support.

How many companies will be born simply because their cost to access hosted storage, tools, technologies, CRM, SFA, etc is so small that there is no longer a risk to just tossing it out there to see if there is interest?

If that ain't a 'paradigm change' I'm not sure what is!

2008 Oct 31 03:39 AM

[Sunil Shah:]

'Paradigm shifts' have one nasty drawback- the shifter usually ends in the garbage heap. CRM has surprisingly managed to keep share price above 30 in this equity meltdown, the only rationale being its cashflow (the pe OF 100 simply could not have survived this carnage). BUT that cashflow does not account for all the shares they issue to staff (it actually adds to cash) to retain them, in lieu of normal salary. Well, now most of the recent options are under water (price down about 40% ytd and falling) we'll see how secure their people are, and how much more old-fashioned salaries they have to pay. Force.com is wonderful for young trendy software people who cant get into the mainstream, but how many applications will be commercialised? Its laughable, they tout their new alliance with facebook and its 127m users- tell me dear bend-my-ear-off, how do propose to convert facebook into commercial dollars, have you any idea what facebook people do and do you think they are willing to pay for it!!! shareprice will be below 15 by year end. I'm banking on it!!

2008 Nov 06 06:37 AM