Salesforce.com inc. (CRM) provides enterprise cloud computing solutions to various businesses and industries worldwide. It was the initial leader in its field, but now it is seeing vastly increased competition from such companies as IBM (IBM), Oracle (ORCL), Microsoft (MSFT), SAP (SAP), and many others. This extra competition is likely to increase CRM's costs even further, and they will help to make CRM a strong sell. CRM may buy another new company (new program that Benioff praises as #1), but CRM's financial performance will allow it to get hammered. The now likely US slowdown/recession will show CRM as a low revenue growth company that is losing money every quarter. This kind of company is typically punished by the market. Below are the many negative headwinds CRM faces.
To start, the above listed companies are not small competitors that you can just laugh off. In fact Oracle's Larry Ellison announced last year on CNBC that Oracle had just completed a seven year development cycle for its new "cloud" products. This included rewrites of many of its software packages for use in the cloud. This process clearly gave Oracle the opportunity to architect a consistent software package that would have a consistent user interface. CRM's products are just a mismatched bunch of programs from companies bought out by CRM. This will make them much more expensive to maintain. In fact the chart of CRM's quarterly R&D expenses shows clearly that they are rising much faster than revenues are.
Revenue only rose 32% in Q4 2013 and 35% for FY2013 (CRM's fiscal year ended January 31, 2013). This growth is expected to slow in FY2014 to 25%-27%. By contrast R & D costs increased by 45% to $430 million in FY2013. From recent announcements, CRM is likely to keep up this pace of growth in R & D (or even accelerate it). Marketing expenses grew by 40% in FY2013 to $1.6B. Advertising expense was $110.7 million in FY2013 versus $80.3 million in FY2012 (about +38%). Cost of revenues grew by 40% year over year in Q4 2013 to $683 million. In other words, CRM's expenses are growing much faster than its revenues. This doesn't look good for the future.
Some point to CRM's growing earnings. However, these are just adjusted earnings. I quote CRM's 10-K, "We expect to incur net GAAP losses in the future. We have incurred net losses in each fiscal quarter since July 31, 2011." Overall the downtrend in GAAP earnings has been in place for at least four years. FY2010 GAAP net income was $80.719 million. FY2011 GAAP net income was $64.474 million. FY2012 GAAP net income was a loss of -$11.572 million. FY2013 GAAP net income was a loss of -$270.445 million. A good portion of the FY2013 loss was a write off of expiring tax deductions that CRM wouldn't be able to take because it isn't profitable. We may see more of this in the future. CRM has a net profit margin of -8.87% (TTM). It also has 11.30% short interest, and it is one of the most highly shorted stocks in the S&P 500.
Some point to CRM's deferred revenues that reached roughly $1.9B by year-end 2013. However, all of this is not necessarily guaranteed. Plus those same people completely ignore the fact that CRM has $1.2B in stock compensation that needs to be amortized to costs and expenses from fiscal 2014-2017, and this does not even include any new stock compensation that will be granted in those years. For instance this $1.2B includes $491.0 million in FY2014 costs, not including the further stock compensation awards during FY2014 (this year). In this light those deferred revenues don't look quite so great.
Yes, cloud technology is supposed to be a growing field. However, the competition from truly big players has been growing much faster than CRM or the cloud market. Oracle is near a $1B in run rate already. It expects this to grow considerably in FY2013. IBM's cloud revenues were up 80% year over year in Q4 2012. By 2015 SAP expects its cloud business to be worth 2 billion Euros. I had trouble separating MSFT's cloud revenues out, but they are growing quickly too. Even MS Office is in the cloud. I could go on, but the point is that many big businesses are growing their cloud segments quickly. They have been around for years, especially IBM. They have great long-term enterprise customer relationships. They are positioned to take some of CRM's cloud business in the future, especially in the enterprise arena. This will impact CRM's churn rates and overall sales negatively.
CRM has also recently closed a sale of $1B of convertible notes, which mature in 2018. The initial conversion rate will be 3.7628 shares of common stock for each $1,000 principal amount of notes ($265.76 per share). CRM additionally entered into privately negotiated convertible note hedge transactions with one or more of the initial purchasers. CRM entered into warrant transactions with its hedge counterparties. This all effectively dilutes the current number of shares, albeit at higher prices than the current stock price. This will tend to put a cap on the stock price, and it will make greedy growth investors unhappy. Some may exit their stock positions after a re-evaluation of the risk/reward ratio.
After the BuddyMedia acquisition in 2012, a considerable amount ($1.53B) of CRM's assets are actually only goodwill. Some investors consider this nothing but hot air. This huge amount of goodwill on the books will probably discourage some serious investors.
Mark Moerdler of Bernstein Research asserts that CRM's results would be much lower on both a GAAP and a non-GAAP basis if CRM used the more conservative accounting practices of other software firms. Two items that he was particularly disturbed about were that CRM capitalizes both sales commissions and software development expenses instead of expensing them as other companies do. CRM also adjusts out stock based compensation. I have already pointed out above how big an expense this is. Benioff's wink and a smile are anything but the actions of a friend.
On top of all of these negative factors, CRM has to deal with the fact that $525.304 million (17%+) in revenues for FY2013 were from Europe. $2,123.736 million of revenue was from the Americas (about 70%). The rest of revenues ($401.2 million) were from the Asia Pacific. The Euro Area is in recession already with the last two 2012 GDP growth readings at Q3 -0.60% and Q4 -0.90%. The EU recession seems to be getting worse. Other data substantiates this.
The NY Times reported recently that 1,000 Italian businesses have failed each day for the last year. Spain has 26.6% "official" unemployment, huge real estate problems, huge banking problems even after the recent bailout, and a December 2012 retail sales growth figure of -10.7%. Further neither Spain or Italy is coming close to meeting its deficit reduction goals. Greece has only 26% unemployment. This should give you an idea of just how ill Spain's economy is. The Eurozone unemployment is at a record high of 11.8%. This all means that CRM's European sales are likely to be significantly negatively impacted in its FY2014 (FY2013 for most companies).
In the US, the Q4 2012 GDP Growth was only +0.1%. Subsequently the payroll taxes were increased by about 2.9% of income for the average American at the beginning of January 2013. Plus a variety of tax increases on the capital gains and dividends were added on the "rich." At the beginning of March 2013, Obama signed an order activating the sequester spending cuts. Together these two actions are expected by many experts to cost the US economy roughly -2% in GDP growth in 2013. This could very well mean a US recession in 2013. It will almost certainly mean lower revenue growth for CRM.
Investors in high growth stocks don't like it when that growth slows down. Revenue growth for CRM was already expected to slow from about 35% to about 25% in CRM's FY2014. When you remember CRM's expenses are almost all growing at rates of approximately 40%+, CRM as an investment starts to look ugly. When you further remember the fact that CRM has actually lost money on a GAAP basis for every quarter since July 31, 2011, you should think about selling your CRM. It has been trending downward in GAAP net income for much longer than that. With all of the other negatives listed above, you should have no doubt about selling now. If you are crazy about the company and its stock, you could consider buying it back after the US economic slowdown/recession in 2013. If you are an aggressive trader, you may want to short the stock. CRM is likely to get hammered this year. Plus remember it does already have 11.30% short interest. This is before real economic trouble and before increased competition asserts itself.
The two-year chart of CRM provides some technical direction for this trade.
The slow stochastic sub chart shows that CRM is close to overbought levels. The main chart shows that it has been in an uptrend since the early fall of 2012. With its high short interest it could continue to go up in the short term if the overall market continues to go up. Momentum stocks with high short interest that are somehow unconditionally adopted by the big brokerages often get short squeezed higher. However, the overall market is currently overbought. Many are calling for a pullback. CRM's uptrend seems to be weakening. Plus CRM is fundamentally a big loser. The company says so itself in its 10-K and 10-Q statements, if you bother to read about GAAP net income in them. A US recession in 2013 could be the straw that breaks the camel's back. Performance may be so miserable that Benioff's boasting will no longer be believed.
At the very least that believability should take a hiatus. If you are willing to stay in a short position through a possible short squeeze, you should be amply rewarded by August 2013 when the US Q2 GDP number comes out, although that may not be the nadir for the stock. If Congress or the Fed take action that you believe will change that GDP outcome, you may wish to re-evaluate your position.
If you merely own the stock, I would sell it immediately - the fundamentals of this stock are far too negative. A strong 4-year downtrend in GAAP net income is strong enough evidence for me. The myriad other negatives just reinforce my opinion due to the GAAP net income trend. I do not like stocks that consistently lose money.
CRM is a sell. It has no PE. It has a 69.1 FPE, but this number has proven to be a mirage for the last two years at least. The old saying, "fool me once shame on you; fool me twice shame on me" comes to mind. Benioff has been fooling people for quite a long time. Some people have made money due to his excellent snake oil salesman skills. However, a recession will make him much less believable. Further CRM fell roughly 70% in the last recession as "growth" stocks tend to do. CRM is a "shoe in" to fall dramatically in a US economic slowdown/recession, especially with the Europe in a still deepening recession. The average analyst recommendation for CRM is 2.0 (a buy). The CAPS rating on CRM is one star (a strong sell). Usually when the dichotomy between these two ratings is this great, the major brokerage analysts are the ones behind the curve. Listen to the CAPS people.
NOTE: Some of the financial information above is from Yahoo Finance.
Good Luck Trading.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in CRM over the next 72 hours.