Salesforce.com: Absurdly Overvalued

OK confession: I have a personal hate. Well, personal in the sense of the absurdity of Salesforce.com's (CRM) valuation. No company in this environment should trade at a trailing PE of 99, however immense the prospective market. Even after taking their deferred revenue cash, cashflow/share gives a price/cash flow north of 50 times.

Optimists will wave their romantic fingers at the potential market up there in the cloud. Well guys that cloud just got a massive shrink. Microsoft (MSFT) is offering their new SAAS product at a 40% discount to Salesforce, AND first 6 months free for an annual sub!

Dont take my word for its pricing or functionality. Read this excerpt, from SearchCRM.Com below:

"You sign up for a year and get the first six months free. It's a pretty good deal," said Bill Patterson, group product manager for Microsoft Dynamics CRM. "We've already seen over 30 folks come from Salesforce.com to CRM Online, and each one of them gave us a similar quote. It worked, but it was expensive."

The offer is good through December 31.

Microsoft has consistently sought to compete on price with its SaaS-based CRM offering. When it first rolled out CRM Online, it offered the product at a promotional price of $39 per user per month in its first year. The current list price is $44 per user per month for its Professional Edition, well below its competitors. Salesforce.com charges $65 per user per month for its Professional Edition, and Oracle CRM On Demand is listed at $70.

It’s far from the first time a CRM vendor has offered to give away its product for a limited time to lure away customers from a competitor. Last October, NetSuite (N) made a similar offer to Salesforce.com users, promising to cut their user fees in half and offering 100 hours of professional services to help with data migration and mapping processes across applications in exchange for a one-year commitment to NetSuite.

While such programs may not significantly affect the number of companies that would not have switched otherwise, "they definitely get people to look at the offerings," said Chris Fletcher, analyst with Boston-based AMR Research, "especially with CRM online and Saleforce.com. It's apples to apples."

Microsoft has not been as aggressive with such promotions until now because it has already seen some success luring away competitors’ customers, Patterson said.

"We wouldn't do them if they didn’t work," he said. "I think they work better in the online space. Your propensity to switch is greater, and you have less of a capital investment [in servers and hardware] to make switching an easier proposition."

Authors note: Short CRM, alas in the massive recent runup. They may scrape this quarter's sales target, but no way jose for the next.

Comments

[User 82877:]

You fail to mention that SFDC will gain more than they will ever lose to MS by capturing the Oracle on-Demand customers as Oracle just announced end-of-life of that product.

Nov 06 08:37 AM

[LoveShorting:]

Consider me your fourth follower. Maybe I am not crazy shorting these scum bags. I appreciate your analysis. My reason for hating on them? Marc with a "c" is a pig. I always carry with me a 20-page Yahoo printout showing his daily (yes automated and legal) selling of shares from 2/5/07 to 8/15/08, some days approaching $1M. That's a lot of lack of confidence in his own company. And by what logic is that pathetic company doing so much for the human race that he deserves that level of compensation? The guy got lucky. He may be smart but he's no Einstein. He isn't curing cancer or bringing about world peace. Anyway, just like Enron, the market eventually catches up with evil ... so I will be short CRM as long as I can tap a keyboard.

Nov 06 10:00 AM

[dowjobber:]

You shorts could to get your heads handed to you on CRM.
Mr Softie has looked like the the loser of the decade and has been blindsided on the cloud, just like they were on e-mail in the 1990's.
Google, VM, and Salesforce have much more imagination than Balmer and the cloud could be Microsoft's undoing. Meantime, just look at todays action on price/volume on CRM. I don't see anyone moving out of CRM despite the negative employment report.
I am an old trader, therefore I am not bold because in the 40 years I've been trading stocks I noticed there are no old, bold traders. If you are ultimately right on CRM, I may sell the break but right now I know the momentum is in the bull camp. Value investors are always too early and Sunil Shah is basing his short on fundamentals, such as PE and an elephant (Mr Softie) in the room. Meantime CRM is making highs weekly since mid-July and blowing through analysts' estimates. How soon will Mr Shah experience the nightmare of the short seller when he dreams CRM going to infinity and he wakes up at 4:00 AM, calls his broker and tells him to cover on the open? Logic tells me to short weakness and this stock isn't showing weakness in the recent volitility. So unless Mr Shah is a swami with a crystal ball I would not short this rocket. Good luck.

Nov 06 12:25 PM

[User 510122:]

Couldn't agree more w/ the trading elements of trying to short a strong stock...why do it?...so much easy money to be made shorting weakness w/ catalysts. i'll also add that having looked at CRM in-depth in a prior life, there's no doubt that its a strategic asset and in a competitive acquisition scenario draws north of $75/share, many believe this could be a "baby" oracle in the making (and orcl/msft all i'm sure looked expensive throughout its growth phase) and the scarcity value of large, growing addressable markets makes this a must own for growth fund managers. if you are going to use multiples to justify shorting it, then the right way to view it would be taking current revenue stream, taking out massive amount of operating expense and capital investment being made towards growth initiatives to get normalized op margins and cash flow....and then u would see that compared to peers it wouldn't be so out of whack. just something to think about that hopefully dampens the pain from being short this. i have a core position w/ basis in 20's on the gift earlier this year...would not be adding here for more than a trade on intraday squeezes...and would never short this stock.

Nov 06 09:07 PM

[Sunil Shah:]

The momentum mojos are right in one respect: a value approach can predict, with reasonable confidence WHAT will happen, not WHEN it will happen. But guys, the ultimate criterion will be based on rationality (as it was during the 99 dotcom frenzy, as it was in homebuilder stocks); reason will prevail and reason clearly dictates this stock has run two maybe three years ahead of itself, in an future environment as fickle and as capricious as a cloud!! Can you say with reasonable conviction SFDC will maintain its 35% rev growth rate for 3 years? IN THIS TOTALLY TURBULENT CLOUDY WEATHER? Time will tell, lets talk in two years. I will weather the rain until then.

Nov 07 07:05 AM

[User 468492:]

Are you serious? You would stay short this stock 3 years? It could be at $300 in 3 years before eventually leveling off. Good luck!


On Nov 07 07:05 AM Sunil Shah wrote:

> The momentum mojos are right in one respect: a value approach can
> predict, with reasonable confidence WHAT will happen, not WHEN it
> will happen. But guys, the ultimate criterion will be based on rationality
> (as it was during the 99 dotcom frenzy, as it was in homebuilder
> stocks); reason will prevail and reason clearly dictates this stock
> has run two maybe three years ahead of itself, in an future environment
> as fickle and as capricious as a cloud!! Can you say with reasonable
> conviction SFDC will maintain its 35% rev growth rate for 3 years?
> IN THIS TOTALLY TURBULENT CLOUDY WEATHER? Time will tell, lets talk
> in two years. I will weather the rain until then.

Nov 07 10:01 AM

[User 221132:]

I think this short idea is intriguing, although it's important to wait for evidence of weakness. I don't know anything about this company, including what it does (yet). But I see its return on equity is about 9.5%, and return on capital is 4.5%. With a pe ratio in the stratosphere, and abysmal returns on capital, CRM fits the magic formula model for short sale possibility.

Moreover, projections of furture earnings always factor in unconscious and crucial assumptions about macro growth. Most investors believe that, sooner or later, a full fledged earnings recovery will happen. But it is far more likely that future earnings will disappoint for nearly all companies--including CRM--for the forseeable future. Disappointing earnings will be the inescapable consequence of on-going capital consumption in the US, due to decades of destructive and worsening government policy.

So CRM looks highly interesting. Thanks for the report.

Nov 08 01:54 PM

[User 221132:]

I'd wait to short this stock until its fundamentals show evidence of actual deterioation. I'd want to see contracting margins, rising accruals, falling current ratio, etc.

If fundamentals later start to decline, this high priced story stock will be a great short. But I think there are better short possibilities, for now.

Nov 08 05:44 PM

[Sunil Shah:]

user 221132, see my previous notes on CRM's moderating revenue growth and traction rate. Sales are clearly decelerating.

Also, how the street reconciles a company on a 118 trailing PE (FPE to Jan 11 of 76!) and a hurdle for sales growth for this quarter of 17% YOY is simply beyond me.

They may well beat the street consensus for this qtr (results 17th Nov), but it sure as hell doesnt justify the valuation.

Looking to short more post results. Go big or go home, as the swamis say on the banks of the Ganges -:)

Nov 13 08:23 AM

[User 510122:]

time to go home i think.

Nov 13 10:52 AM

[ukdaytrader:]

Mr Shah, I think there is a greater chance of you losing your trousers before this stock falls. I take your point on the overvaluation, however this is an angle for most tech fund managers, and to be out of it would not be following the herd instinct, in fact there are managers out there who are now buying into it even now having missed the recent expotential gains. Try explaining to your investors that as a tech fund, your not in CRM !!

Nov 14 04:55 PM

[dowjobber:]

Mr Shah,
I think you should look at put options rather than shorting the stock.
At least that way, you know how much you stand to lose. Sure the PE is out of sight, but look at the last tech boom. JDS Uniphase went up 7000% with multiplexing light wave pump lasers. We called these long and strong buyers "Uniphasians" because if you made a negative comment on a blog site, they would storm in and crucify the offender. It was a real cult, pumped by George Gilder. Don't short into this strength on CRM, it could bury you since most people don't know what a cloud is, but they do look at charts and chase momentum. This stock has not yet hit the "Uniphasian Cult" stage yet and it trades thin.
Incidently, I am a money manager and have been doing it for a long, long time and I am long this stock but with no illusions and I don't love nor hate any stock. Falling in love or in hate is a ridiculous pursuit, these stocks are pieces of paper.

Nov 16 02:44 PM

[dowjobber:]

LoveShorting
Bill Gates, when chairman and CEO, sold a lot more than a million$ worth per day. This keeps management out of trouble with
the SEC and lawsuits for insider trading if they sell a fixed amount every day. It also alllowed Bill Gates to give his fortune to his foundation which will help the human race. Maybe Marc has the same thing in mind!


On Nov 06 10:00 AM LoveShorting wrote:

> Consider me your fourth follower. Maybe I am not crazy shorting these
> scum bags. I appreciate your analysis. My reason for hating on them?
> Marc with a "c" is a pig. I always carry with me a 20-page Yahoo
> printout showing his daily (yes automated and legal) selling of shares
> from 2/5/07 to 8/15/08, some days approaching $1M. That's a lot of
> lack of confidence in his own company. And by what logic is that
> pathetic company doing so much for the human race that he deserves
> that level of compensation? The guy got lucky. He may be smart but
> he's no Einstein. He isn't curing cancer or bringing about world
> peace. Anyway, just like Enron, the market eventually catches up
> with evil ... so I will be short CRM as long as I can tap a keyboard.

Nov 16 10:14 PM