Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Shares of Salesforce.com (CRM) rose almost 9% in Wednesday's trading session. The provider of enterprise cloud computing solutions reported its third quarter results on Tuesday after the market close.

Third Quarter Results

Salesforce.com reported third quarter revenues of $788 million, up 35% on the year. Revenues exceeded analysts' expectations of $776.5 million, despite a $13 million headwind caused by a strong dollar.

The company reported non-GAAP diluted earnings per share of $0.33 during the quarter, exceeding analysts' consensus by a penny. The company reported a net loss of $1.55 per share on a GAAP basis, mainly driven by $149 million charges related to the revaluation of deferred tax assets.

Deferred revenues which are on-balance sheet rose 41% to $1.29 billion. Unbilled deferred revenues which are not listed on the balance sheet rose to $3 billion.

CEO and Chairman Marc Benioff commented on the results, "Salesforce.com is the first enterprise could company to exceed a $3 billion annual revenue run rate, with outstanding third quarter revenue growth at 35% in dollar and 37% in constant currency. Given the strong customer response to our next generation social and mobile cloud technologies, I'm delighted to announce what we expect to surpass a $4 billion annual revenue run rate during our fiscal year of 2014."

Outlook

For the fourth quarter of its current fiscal 2013, Salesforce.com anticipates revenues to come in between $825 and $830 million, up 31% on the year. Non-GAAP earnings are expected to come in between $0.38 and $0.40 per share, while the company will report an expected GAAP loss between $0.23 and $0.25 per share.

For the fiscal year of 2013, Salesforce.com expects full-year revenues around $3.04 billion. The company will report a GAAP net loss of $2.00-$2.02 per share, with non-GAAP earnings coming in at $1.50-$1.52 per share.

Salesforce.com already issued a full-year revenue guidance for its fiscal 2014. For the year, the company expects revenues to come in between $3.80 and $3.85 billion, up roughly 26% compared to this year. The revenue guidance is in line with analysts' consensus of $3.83 billion.

Valuation

Salesforce.com ended its third quarter with $1.4 billion in cash, equivalents and marketable securities. The company operates with a modest amount of debt, but has $515 million in convertible senior notes outstanding.

For the first nine months of its fiscal 2013, Salesforce.com generated revenues of $2.22 billion. The company reported a net loss of $249.6 million, or $1.78 per diluted share.

The market values Salesforce.com at $22.1 billion. This values operating assets at roughly $21.2 billion, assuming the non-conversion of the convertible senior notes. As such, operating assets are valued at roughly 7 times annual revenues and approximately a 100 times non-GAAP full-year earnings. The revenue multiple will come down to 5.5 times next year.

Some Historical Perspective

Year to date, shares of Salesforce.com have risen some 56%. Shares started the year around the $100 mark and quickly advanced to $160 in April as technology and cloud stocks in particular were hyped up in anticipation of the Facebook (FB) public offering. Shares fell back to $120 in August, but are currently exchanging hands again at $159 per share.

Over the past decade, shareholders of Salesforce.com have enjoyed a good ride. Shares steadily rose from $15 in 2005 to levels around $75 in 2008. Shares fell back to $25 during the financial crisis and steadily rose to levels around $160 at the moment, trading around all-time highs. Between its fiscal 2009 and 2013, Salesforce.com almost tripled annual revenues from $1.08 billion to an estimated $3.04 billion this year. The company reported a modest profit of $43 million in 2009 and is expected to post a net loss of almost $300 million this year.

Investment Thesis

Salesforce.com has generated strong revenue growth over the past decade. Strong underlying revenue growth and a string of acquisitions resulted in annual revenues exceeding $3 billion this year. The strong stock performance gave the company a strong currency to buy technology companies to boost growth.

Despite the tremendous revenue growth, the company is still expected to post a net loss for the full year. Even on a non-GAAP basis, the valuation multiples are extreme. More worrisome is the fact that Salesforce.com classifies stock-based compensation expenses not as a recurring expense on a GAAP basis. In the third quarter alone, Salesforce.com handed out $105 million in stock-based compensation to its employees in order to keep them motivated.

CEO Benioff continues to excessively promote the company. Instead of pointing out its revenue outlook of $3.80-$3.85 billion, he comments "I'm delighted to announce that we expect to surpass a $4 billion annual revenue run rate during our fiscal 2014."

Combining it all, I see a lot of red flags. Salesforce.com uses an inflated currency, its stock, to make acquisitions which boost revenue growth. Furthermore, its CEO seems to have a full-time job in promoting the company and its stock price. Accounting metrics are a little shady as well, with stock-based compensation expenses of $105 million in the third quarter alone being wrongly classified.

I think it is clear that I won't consider a long position. However, shorting a popular stock is dangerous as well, even if your investment thesis is the right one. The market can stay irrational longer than you can remain solvent, so how to benefit from a share price which is expected to fall when you don't know the timing?

Shares are trading around all-time highs at $160 at the moment. Shares hit these levels already back in 2010 and 2011, so on a technical basis, it could indicate that we have reached a plateau. Bearish investors could gradually over time add on to their short positions or simply initiate one at these levels.

Source: Salesforce.com - A Renewed Test Of All Time Highs Creates A Short Opportunity