Why The Shorts Are Wrong About Salesforce.com

May.22.14 | About: Salesforce.com, Inc. (CRM)

Summary

Salesforce.com is seeing rapid growth in revenue, and the company has increased its full-year revenue forecast.

Salesforce's earnings are expected to grow at double the rate of the industry average for the next five years, making it a solid investment.

However, Salesforce's short float has been growing, but investors should ignore it and focus on the company's strong business.

Although Salesforce.com's (NYSE:CRM) earnings are expected to grow at almost 30% for the next five years, some investors seem to be buying none of that. If we take a look at the company's short float, this fact would become clear. As of April 30, 45.14 million shares of Salesforce were short, up from 43.80 million in the prior month. All this is despite Salesforce.com being among the world's most admired software companies, according to Fortune Magazine.

Also, Salesforce posted revenue growth of 37% to $1.23 billion in the first quarter and issued a strong outlook for the current one. Moreover, Salesforce raised its full year guidance, expecting year over year revenue growth of 30%-31% this fiscal year. Despite all these positives, Salesforce shares fell after the company reported earnings on account of a wider loss.

Salesforce reported a loss of $96.9 million in the first quarter, compared with a loss of $67.7 million in the year-ago period. However, the company did beat the bottom line estimate on adjusted earnings, reporting $0.11 per share as against the expectation of $0.10 a share.

Robust growth

Critics of the company will point out to the widening net loss figure. However, Salesforce operates in a fast-growing cloud environment and the company is making investments to grow its business. As such, some hits to the bottom line can be expected as it tries to gain market share.

For example, Salesforce.com had registered more than 200 transactions in the fourth quarter of last year that were seven figures or more. Also, they included more than 10 eight-figure transactions. It is determined to repeat such performances going forward on the back of strength in its cloud-based platform. The company's SalesForce1 cloud and service cloud applications are gaining traction due to enhanced services and support, and it expects this to be a strong growth driver going forward.

Why the growth should continue

Salesforce1 has been built API first, and it can connect with anything and everything on various devices such as smartphones and tablets. The success of Salesforce1 can be gauged by the fact that the company announced over 250 major independent software vendors, or ISVs, have agreed to build Salesforce1 applications on the company's AppExchange. Also, Salesforce.com already has more than 30 Salesforce1 apps like Evernote, Dropbox, LinkedIn (NYSE:LNKD), and HP Live on the AppExchange.

Salesforce.com's other interesting segment, service cloud, also looks primed for growth after the launch of Desk.com. The service cloud focuses on small service concepts for small businesses. Also, Salesforce's ExactTarget Marketing Cloud is claimed to be the world's most powerful customer platform for one-to-one marketing, according to management.

The ExactTarget Marketing Cloud would be a big advantage for Salesforce going forward as it is determined to capitalize on the industry's growth. According to Forrester, spending on digital marketing is expected to double in the next five years, representing 30% of the total marketing spend by 2017.

Salesforce is also counting heavily on its flagship Sales Cloud product, which is among the leading platform for sales, according to IDC. The company is looking to make the Sales Cloud platform even better by deploying next generation apps, which is why it expects good traction in its sales, service, and marketing with Force.com in place. Additionally, Heroku and Fuel are also making its ecosystem stronger, leading to tremendous improvements in the number of app developers on the Salesforce platform that have increased 50% year over year to 1.5 million.

Fundamentals and final words

Salesforce currently does not have a trailing P/E ratio as it is running in loss. Also, its forward P/E of almost 72 also seems high. A rich valuation such as this is another reason why shorts have been piling into Salesforce. However, as we saw above, analysts expect Salesforce's earnings to grow at an estimated CAGR of 29.50% for the next five years, almost double of the industry's CAGR of 15.92%.

The company is seeing good momentum in the business with rapid revenue growth, and given the expected earnings growth rate, I think it is a solid investment. As such, investors should ignore the shorts and focus on its long-term prospects.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.