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I'm attracted to companies that are growing at high rates and have management with significant insider ownership. One of the most interesting growth stocks to analyze is Salesforce.com (CRM). The company is expanding into new markets, executing cost optimization measures and its management is optimistic on future growth, according to the company's last earnings transcript.
The company just reported very solid earnings in late November that made the stock approach new high levels. I am always looking for compelling growth opportunities. Salesforce.com is 65% YTD and several institutional investors have been buying the stock in the recent quarters. Salesforce.com shows a strong combination of innovation and growth.

Analyzing Salesforce.com EPS and sales trends

The first step when analyzing Salesforce.com is evaluating its recent earnings per share performance. Certainly, how a company has performed in the past is helpful information because it gives you strong clues about how it will handle the future. Barring some unforeseen circumstance, most companies move in a predictable manner.
CRM increased last quarter EPS at -3% compared to the same quarter in the previous year. I think the company will improve its quarterly EPS growth in the near future. I am looking for quarterly growth rates above 15%. I am not encouraged to see that CRM generated less than that number. Past growth winners (Apple (AAPL), Baidu (BIDU), etc) generated quarterly EPS growth above 15% and I am certainly looking for that level.
Analysts recently upgraded its estimates for the current year, increasing their EPS projections 9%. This shows that sell-side analysts are confident in the company. In addition, Salesforce.com generated 3 year average annual EPS growth of 14%. I do not like that Salesforce.com grew less than 15% in the past 3 years, which is the minimum annual growth level I am looking for when investing in growth stocks. This fact does not prevent me from potentially investing in CRM but it is certainly a red flag.
A key step in analyzing Salesforce.com is studying how sales grew in the recent quarters or years. Why is this important? Revenue growth can not be masked with accounting tricks or via cost cutting strategies. This metric tells you in simple terms how demanded a company´s products or services are. Salesforce.com revenues grew 35% last quarter year over year. CRM generated strong quarterly growth levels. I am confident in Salesforce.com's continued success in emerging economies. It is a very solid signal that CRM generated quarterly revenue growth above its last reported earnings growth levels. In addition, the company shows a 3 year annual sales growth rate of 35%. CRM sales went up more than 15% (minimum growth I require) in the past 3 years, a very encouraging signal. I think that strong sales growth levels show that the company is doing well.

Salesforce.com management execution analysis

In addition to understanding CRM past EPS and sales growth it is essential to focus on analyzing ROE. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry. The ROE of Salesforce.com is -14%. I do not like to see a ROE below 17% because I have found that the best growth stocks historically had ROEs above that level. A higher return on equity means that surplus funds can be invested to improve business operations without the owners of the business (stockholders) having to invest more capital.
It is essential to evaluate Salesforce.com ROA which is -2%. This ratio measures a company's earnings in relation to all of the resources it has at its disposal (the shareholders' capital plus short and long-term borrowed funds). Thus, it is the most stringent and excessive test of return to shareholders.

Institutional investors have been buying Salesforce.com

I also evaluate recent institutional activity in the stock. In other words, I want to know which hedge funds bought the stock in recent quarters. In the recent quarter, both GLG Partners and Balyasny Asset Management among other prominent investors bought CRM at an average price of $145.

Competition analysis

In this step I analyze Salesforce.com competitors. I track their most important multiples in order to easily understand how the market prices each company in comparison to CRM. Let´s review each company:
One of Salesforce.com's key competitors is Oracle (ORCL) which trades at a market cap of $156 billion and a P/E of 16x and a P/S of 3.6x. The fact that Oracle keeps expanding in both the US and emerging markets could be a potential threat to CRM core segments. Oracle trades at a lower P/E than CRM. Sometimes this shows that the market places lower expectations in Oracle. It is important to understand whether Oracle fundamentals are much better than Salesforce.com's.
Salesforce.com also competes against SAP (SAP) in some areas. This stock trades at 25x earnings, 5.28x sales plus a market cap of $95 billion. I find interesting that SAP trades at a lower P/S than Salesforce.com. Is this a signal of lower revenue expectations for SAP? I am very confident in CRM growth.
Intiuit (INTU) is another competitor to take a look at. It trades at 25x earnings and 4.25x sales, compared to CRM's P/E of 82x and P/S of 7.7x. I will also evaluate Microsoft (MSFT). This stock trades at 14x earnings and 3.08x sales. MSFT competes in several cloud segments.

Valuation analysis

The final step is evaluating how cheap or expensive Salesforce.com stock is in relation to its industry and the market. I like to use simple multiples as the current and forward P/E and P/B and P/S to analyze whether CRM is cheap or expensive. Salesforce.com is trading at 82x trailing P/E in comparison to its industry average P/E of 32x and SP&500 P/E of 15x. Salesforce.com trades at a premium to the general market. I think that investors have high expectations on CRM projected EPS for 2013. The company trades at a premium to the industry average P/E of 32x. This indicates that the market has good expectations for CRM numbers for 2013. It is essential to evaluate CRM 5 year average P/E ratio in order to get a complete perspective. The company has a 5 year avg. P/E of 800x. In addition to its P/E, CRM trades at 10x book and 7.7x sales.

Conclusion

I think that the stock is a very compelling growth opportunity. I do not like the fact that the company trades at very high valuation levels but institutional investors keep buying it and analysts keep upgrading its expectations. This is one of the most interesting tech picks to consider.

Source: Salesforce.com: To Invest Or Not?