Salesforce.com Inc. (CRM) operates on a global scale. It sells cloud computing and services such as marketing research, performance management and consulting. It is a significant, though not dominant, player in the technology/app software sector. Based on a broad view of the industry, broader economic trends and thorough fundamental analysis, buying salesforce.com for a mid-term trade is advised.
Competitor and Economic Perspective
Oracle (ORCL) and SAP (SAP), both direct competitors, have market caps of over $90B and EBITDA values of $17.29B and $7.19B, respectively. CRM is small by comparison, with a market cap of about $24B and EBITDA of $84M. This data indicates room for growth and stock price increases as CRM figures more prominently with large-scale potential customers and clients. Cash flow and competition analysis hints that CRM has substantial room to grow. Though the stock is volatile, the overall trend is likely to be further increases in the price of the stock.
The company has grown to an enterprise value of $23.7B since its inception in the late 1990s. An impending widespread recession can provide a great shorting point; smaller events or market corrections are not likely to shake CRM to any significant extent. Nevertheless, broader economic analysis can offer some clues as to when a shorting point could develop. Some argue that the stock market rise since 2009 is due to currency printing by central banks in the U.S. and elsewhere. A recent article titled "The Next Country To Collapse Isn't In Europe" extrapolated current trends in Japanese debt and monetary policy. It predicted a substantial stock market pullback roughly 18 months from now, around October 2014. If this happens, CRM will reach a selling or short sale entry point in late summer or early fall of 2014.
By some measures, the last twelve months have not been kind to Salesforce.com Inc. Profit and operational margins were significantly negative during 2012. Return on equity was nearly -14% in 2012. Current ratio of 0.69 and a high forward P/E of 64.71 contribute to skepticism about CRM's future prospects. These company statistics are important, but need to be considered in light of more comprehensive company performance data. Consider company financials between 1/30/2011 and 1/30/2013:
• Balance sheet: Assets and liabilities increased at an even pace, roughly 77% from January 2011 levels. Notably, capital surplus rose over 120%, with stock option warrants adding an additional $53.6M to CRM stockholder equity by 1/30/2013. These two factors boosted stockholder equity 80% over the 2011-2013 reporting timeframe. If this trend continues, it would argue very strongly against a short-sale in the near future.
• Income statement: The most recent data shows that CRM's gross profit increased by 43.6% since Jan 30, 2011. However, Research and Development expenses increased by 128% during the same timeframe. And with general and administrative expenses nearly doubling in two years, profit could not keep up, resulting in a swing from $64.7M net income as of 1/30/2011 to a net loss of $270.4M as of 1/30/2013. In itself, this data signals that CRM stock is losing steam, giving an entry point for a short sale.
• Cash flow: Most importantly, CRM's operating activities generated over $736.8M in positive cash flow as of Jan 30, 2013. This is a 60% gain over two years, with no comparable gain from investing and financing cash flow. Even with far smaller investing and financing cash flow, strong operating cash flow performance justifies CRM's reputation as a strong long investment.
Fundamental data hint that the last year has been unusually rough for CRM, hence some of the negative metrics in reference to recent company performance. However, an in-depth look at Salesforce.com's cash flow and balance sheet data indicates that this company is not likely to decline in the near future. Steadily increasing operating cash flow and a substantial capital surplus on the balance sheet argue that CRM will likely see an increase in share price.
CRM stock has gone up in price unless there seemed to be a very good fundamental reason to drop. Since 2005, it has consistently outperformed S&P 500 (ticker: ^GSPC). Between 1/3/2005 and 4/22/2013, CRM recorded an 800% gain. The broader ^GSPC index recorded only a 33% gain. The 200 SMA has acted as a price support since January 2005. Price corrections on May 2006-Sept 2006 and July 2011-Feb 2012 were short-lived, uncertain, and would have given a relatively small return on a short sale. The price trend since 2005 strongly argues against shorting CRM anytime in the near future. That could change if costs are not kept in check and expansion were to take a turn. For now I would recommend CRM as a buy.