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Summary

  • Salesforce's valuation, which continues to apply a "N/A" in the P/E column, is the only thing keeping value investors at bay.
  • After a decade of outperformance, it's time to take this company seriously, especially on this recent pullback.
  • If the company can guide with enough confidence to affirm near-term outperformance, Salesforce should reach the $60 mark within days of this report.

After market close Tuesday, enterprise cloud giant Salesforce.com (NYSE:CRM) will report first-quarter earnings. The stock closed Friday at $51.80, up 0.74%. But the shares are down more than 6% year-to-date. Salesforce, which has quickly built itself into a leader in the growing software-as-a-service (SAAS) market, is and has always been a very interesting story.

Despite constant moans about the company's valuation and its seemingly apathetic approach towards profits, Salesforce has always delivered the growth investors have come to expect. And it has done this in the face of stiff competition from the likes of IBM Corp. (NYSE:IBM) and Oracle (NYSE:ORCL), two traditional enterprise software titans that want nothing more than to put Salesforce out of business.

The prevailing question continues to be, to what extent can Salesforce continue to outperform. And at what point will profitability matter? On Tuesday, management will have an opportunity to answer this question, as well as many others. But before they do, Salesforce will need to appease its doubters with another beat. But this time, will it be enough to get the stock to reverse course?

On Tuesday, analysts will be looking for Salesforce to post 10 cents in earnings per share, which will be flat on a year-over-year basis. Despite the better-than-expected results seen from other enterprise giants like Cisco (NASDAQ:CSCO) and Rackspace (NYSE:RAX), the Street has not revised Salesforce's estimates, which is a surprise. For the full year, earnings are expected to be 50 cents per share, up 43% year-over-year, topping last year's mark of 35 cents per share.

In terms of revenue, the Street will be looking for $1.21 billion for the quarter, 36% higher than the year-earlier total of $892.6 million. For the full year, revenue is projected to come in at $5.29 billion, up 30% year-over-year. Revenue, which has grown for two consecutive quarters, has been the company's strength. In the February quarter, Salesforce posted roughly 30% revenue growth, and 36% growth the quarter before that.

With signs that business conditions are improving, I don't expect Salesforce to have any problems on Tuesday. Given the rate at which companies are accumulating "big data" and positioning their models for cloud efficiency, it seems reasonable to project strong ongoing demand these services. Still, even with Salesforce's lead, I don't envision a scenario where Red Hat (NYSE:RHT), EMC Corp. (NYSE:EMC) and Oracle are just going to concede this market.

Also, with tepid growth seen from Microsoft's (NASDAQ:MSFT) Azure platform, Salesforce's ongoing success makes it a prime acquisition target for a company like Microsoft, which has embraced a shift from strictly selling software to a focus on services. Microsoft's existing enterprise footprint makes this a worthwhile consideration, particularly given its recent push with Office 365. To date, Microsoft has not made any value-creating deals to show that it is a serious contender.

All told, Salesforce's valuation, which continues to apply a "N/A" in the P/E column, is the only thing keeping value investors at bay. But after a decade of outperformance, it's time to take this company seriously, especially on this recent pullback. With the stock trading at $51, Salesforce is a sure-bet $60 by the second of the year. To the extent that the company can guide with enough confidence to affirm near-term outperformance, Salesforce should reach the $60 mark within days of this report.

Source: Microsoft Should Buy Salesforce.com Before It Reaches $60