Salesforce.com Unlikely to Sustain Its Current High Multiple 22 comments
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Investors have cheered the most recent earnings release from Salesforce.com Inc. (CRM) and understandably so. For the quarter ending October 31, the company managed to grow revenues by 43% to a total of $276.5 million. Management noted that their services offer low start up costs, low risks, and fast results… A valuable proposition in these challenging times. But despite the eye popping revenue numbers, earnings just don’t seem to add up when considering the stock price. Earnings per share were $0.08 compared to just 5 cents in the third quarter last year. While that is a full 60% gain, the fact remains that it is still just 8 cents. Analysts are expecting a total of 31 cents for 2009 (the fiscal year ends January 2009), and expectations are for $0.51 in earnings for the following year. Impressive growth, but the valuation still seems quite a bit pricey.
ZachStocks disclosed concerns with this company back in August prior to the second quarter release. Since that report, the stock has dropped as much as 65% before rebounding sharply over the past month. But despite this lower stock price, risks still seem to outweigh the potential benefit of owning this growing company. In fact, investors will likely use the recent bounce to lighten up on their exposure and I expect the stock to fall again. Momentum players will not likely be part of the shareholder base as CRM is somewhat tarnished.
To be fair, Salesforce.com is actually a very good company and the business has performed tremendously well in this volatile environment. The balance sheet continues to be healthy with no debt and cash equivalents of more than $800 million. The number of new customers continues to increase impressively and international expansion should continue to bolster growth (even if the rate of growth decelerates). Deferred revenue is $470 million meaning that the company has already received payments for services in the coming quarters and will automatically be able to recognize that revenue in Q4 and into next year.
Still, the current environment has been brutal to high-multiple growth names. I do not expect to see this trend abate because investors will continue to take a skeptical approach for some time. High multiples will need to continually be re-assessed as companies are required to prove the merit of these valuations. And disappointment will not be treated kindly for names that currently hold such a multiple. In short, the risk appears to be quite large, but the potential reward is still questionable.
Salesforce.com is a wonderful company that I would like to own at the right price. I value the growth of the franchise and have tremendous respect for the management team. However, with the stock at more than 100 times this years expected earnings, I believe the money is to be made shorting at current levels. If the stock were to drop to $15 or below, that would begin to pique my interest.
Disclosure: Author does not have a position in CRM
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This article has 22 comments:
Anyone have a differing opinion? Is there a rational justification for the stock at this price? What would surprise investors to the point that we would see a higher price from where it is now?
Zach
zachstocks.com
You dont understand what I mean.. you see analysts are like wolf in sheep skin they try to steer investors away from other stocks by fear mongering them back into oil stocks still considered the safest stocks around even as oil prices had tanked.. Why? because oil investors are still convinced that we will splurge money on gasoline all over and run prices up again.. oil sharehlders are very patient types..
I just thought of a better explanation for those kinds of analysts like Zachary on his article on CRM or any other stocks... I call this something like delaying tactics which mean trying to stall investors from going to certain stocks so to steer capital into other stocks. Analysts would use any kind of arguments that they think would sell or convince investors to stall or pause .. Overall, I see the possiblilty that so many analysts are currenlty all over trying to stall investors from investing in any stocks as if in hope to preserve Big Oil stocks and the similar ones that is preferred by the more priviliged investors. After all, Big OIl actually messed up our economy, yet they are not punished that much. who could argue with grossed out profits made by Big OIl.. They are safe stocks all right , why go elsewhere?? It is very damaging but oil investors could not care any less.. It is so hard for me to articulate things like that to any reader who see no reason to suspect anything or bother to dig deeper.. It is what I call behavior pyschology..
where are you ??
You are certainly right in both your mention of the relationship with Google and the short float. This is a headwind to my assumption but in my opinion does not negate the difficult fundamentals and high multiple. Since the stock bounced more than 50% from its low, it would appear this might be a more opportune time to short as those two issues probably had a good effect on driving the stock higher. But in time, the fundamentals will carry more weight and so I think above 30, this stock has a good bit of risk.
Thanks all (even Gumby) for your comments
Zach
zachstocks.com
To me it looks like, regardless of the merits, the hedge funds are piling on short positions and may target CRM as their next meal . 62x FY Jan 2010 earnings is VERY rich, and that's IF they manage to grow earning 60%+ in the worst economy in a generation.
1/3 of CRM's business is from small businesses and spending may grind to a halt there.
Great company but way overpriced in my view - what is the upside from here? Say they do hit the numbers and grow earnings by 60% in a brutal economy, fight off competition and price cuts from Oracle/Netsuite, etc. then they are still trading at 62x those earnings. So maybe it could go to $40?? But the downside is probably $10, so I think there are way better risk-adjusted bets out there. Somehow buying something like Intel (just to use an example) at 4.5x EBITDA seems like a better risk adjusted bet.
By the way I am short, for full disclosure.
I do agree with you, however, that fundamentally, the stock is already pricing in any good news. Even if they turn in tremendous performance over the next few quarters, the company will simply grow into the big shoes that the stock is implying. There seems to be much risk and very little upside. Well said.
Thanks for the disclosure too - I remain neutral with no position.
Zach
zachstocks.com