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By John Critchley

Is Whitney Tilson at it again? Possibly shorting a high flyer with broad hedge fund support and ownership. This time his bulls-eye appears clearly aimed at Salesforce.com (NYSE:CRM).

Whitney Tilson gave an analysis last week arguing that Salesforce.com is an underlying priced for absolute perfection. Here is how he values CRM:

“Call me old school, but I think GAAP earnings matter and I think all compensation is an expense, whether it’s in the form of cash or stock options. But the company basically has no GAAP earnings to speak of, nor is it expecting any this year, so let’s give the company every benefit of the doubt and use its pro-forma earnings: $1.22trailing and $1.38 (the high end) for this year (up a mere 13%). What would be an appropriate multiple? 20x? 30x? Using 30x x $1.38 = $41.40 plus $10 in cash = $51.40. As I write this, the stock is nearly 3x this at $138.83, giving it a market cap of $19.5 billion. Let’s be even more generous and use free cash flow, and let’s annualize $135M of FCF in Q4, so that’s $540 million. Put a 20 multiple on this and that’s $10.8 billion, plus cash equals $12.2 billion, just over half of the current value.”

Here are some other factors behind Tilson’s apparent bearishness toward Salesforce.com:

  1. Salesforce.com’s margins will contract significantly due to mounting competition.
  1. Liberal granting of stock options to employees. This has diluted the float at an alarming rate over the past year.
  1. Those who know are selling: Insider sell transactions at CRM are occurring at a rapidly increasing rate.

Salesforce.com closed recently at $134.37. So far the stock has hit a 52-week low of $73.91 and 52-week high of $151.26.

Earnings are expected to be announced after the bell on 5/19/2011. With 30-plus analysts covering CRM, the consensus estimate is $0.27, and the high and low estimates are $0.29 and $0.26, respectively.

A Bearish Earnings Options Play

Are you in T2’s bearish camp toward Salesforce.com? If yes, let’s look at a bearish options play:

The 30-day implied volatility appears to be quite reasonable at the 45% level. These options are trading not far from the 52-week, 30 day IV lows of 38.2 reached on January 14, 2011. This is not a surprise considering the run-up in the underlying.

To find any decent implied volatility option plays, one must go out at least to the June '11 options, which present a compelling value in front of an earnings release next week.

Trade Idea

The play: To take advantage of normal downside implied volatility skew and to benefit from any downward pressure in Salesforce.com stock before earnings.

a) Buy June 125-110 put spread for $ 2.65. Receiving about 4.6% in Implied Volatility skew ( buying 46.2 IV vs. selling 50.8 IV).

To finance this spread:

b) Let’s sell the June 150 calls at 2.55 This is approximately a 44.3% Implied Volatility.

Net debit: $.10.

Risk: You will be short the stock over $150. A 10.6 % upward move in Salesforce .com over the next five weeks.

Let’s make sure we revisit this trade in advance of earnings.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: A Rainy Day Forecast in the Clouds for Salesforce.com?