1. Company: Salesforce.com (CRM)
2. Trade: 1,000 shares long
3. Price: $31.70
4. Target Price: ~$42
5. Stop Loss: $29.9
6. Date: May 12, 2006
I love the Salesforce product and business model. The company offers a hosted CRM, or Customer Relationship Management, software application. That means that you log in through a normal web browser like Internet Explorer or FireFox, and access your company’s sales data. The beauty of CRM is that ALL businesses have a sales team, and the market is huge. Companies in this space include PeopleSoft (now part of Oracle) and SAP, two of the largest software companies in the world.
What SalesForce.com does that is so special is offer a multi-tenant, simple and lightweight instance of it’s software. That means they don’t need to constantly service older versions of the software, since every single customer is logging in and using the same piece of software. Think about a company like Microsoft. They have people using Windows 95, 98, XP Home Edition, XP Professional, and Media Center. They need an army of people to support their customers; luckily, they’re a consumer company so they simply don’t service the majority of their customers. CRM is different - it’s a mission critical application that requires immediate support for users that are having issues. Having one version of the product cuts their service costs tremendously. Moreever, they spend less money on R&D since all their engineers are working on developing one version of the product, instead of splitting their engineering resources dealing with upgrade or migration paths for older versions of the software.
Salesforce is trading a very rich valuation. It is trading at a market capitalization of $3.5 billion dollars, with TTM revenues (trailing twelve months) of $310 million. That’s a 11x Enterprise Value to Revenue multiple, with an even more ridiculous 130x Enterprise Value to EBITDA multiple. There is also rumors that the company has reorganized its sales team in Q1, which could have resulted in some lost sales.
However, I believe that the company has already guided Wall Street’s expectation’s down for Q1 and should beat expectations. This is widely considered to be one of the more innovative software companies to have emerged from Silicon Valley in the last 10 years, and it deserves a rich premium. Their revenue figures cannot be compared apples-to-apples with other software companies because CRM is a recurring revenue business as opposed to an upfront license business.
Most importantly, Salesforce has invested significant dollars into their new AppExchange product, which allows partners to integrate the SalesForce product into numerous other applications, driving both adoption as well as stickiness of the product.