To say that Salesforce.com (CRM) has been on a tear lately is an understatement. With its stock more than doubling in less than a year, it has reached “superstar” status in just about everybody’s book. Its dizzying run has made a lot of investors rich while decimating those who dared to short it.
With a market cap of over $19 billion, Wall Street seems to be pricing this one like they just found the cure for cancer. Selling at 125 times 2011 earnings estimates of $1.17 sounds feasible, if the company was destined for huge earnings gains, but analysts have forecast a rather tepid 18% growth in 2012 from $1.17 to $1.38.
If you put CRM’s valuation in perspective and calculate its return on investment, you will be shocked. You would have to invest $146 to get back $1.38; that equates to a minuscule return of less than 1% - you can do better than that in a risk free CD.
To make matters worse, the company has only about $200 million cash (when offsetting its debt) and sells at 15 times book.
Why is the valuation so high? To put CRM’s nose bleed valuation in context, its market cap is roughly the equivalent to the three of the largest US supermarket chains (Kroger (KR), SuperValu (SVU) and Safeway (SWY)) combined. Yet these three companies together produce revenues of $164 billion and earnings of over $2 billion. KR’s cash dividends alone - of $267 million - are more than CRM’s expected 2012 earnings of $180 million on sales of $2 billion.
The trio of supermarket operators together generate revenues 80 times higher than CRM and ten times its earnings, yet CRM is by itself worth just about the same market cap as all three combined - where is the logic here? There is no logic, except that CRM is a momentum casino play that is attracting the pure gambler type. The greater fool theory seems to be in full effect on this one. Eventually, the bar will be set too high and CRM will miss expectations, prompting the bottom to fall out. When the stock finally does come back to earth, it will happen in a “blink of the eye”, as stocks typically fall at twice the rate as they climb, since fear has a more powerful effect on the markets than elation.
Bottom line: CRM seems to be doing everything right and is no doubt a great company. The problem is, it has become too expensive – perfection and then some has already been built into the share price. The stock is way overbought (it has gone up too far in too short of a timeframe) and needs a bout of profit taking to correct and take the excesses out. The insiders seem to already be in a profit taking mode, as they have rung the cash register on nearly $250 million in shares during the last six months. Shouldn’t you be on their side?