Salesforce's On Fire: So Why Am I Short Its Stock?

Let's face it. Salesforce.com (CRM) has been setting the Customer Relationship Management segment field on fire. Its growth rate far surpasses that of Microsoft (MSFT), Oracle (ORCL) or SAP (SAP) for that matter. Its 52 week price performance is up 43% as opposed to 13% for the S&P 500. As its customer base is currently located in the United States it has the international market to look forward to. So you may ask, if I am such a big fan what is with the call for going short? Great question…

Let’s start with the companies gross margins which have trended lower from 79% in October 05’ to 76.9% in the October 06’ quarter. What I find most disturbing however is that the Net Margins for the same timer frame have dropped off a cliff from 6.4% to 1.3%. Yikes….

I am of the firm belief that a speculative bubble has been built around this stock. The speculative story is one of a take over. All one needs to do is review the company’s 8K which was filed with the SEC on January 16th. CEO Mark Benoff and his management team set up handsome golden parachutes. All systems go for the traders to squeeze the shorts.

Whey you buy a stock with 40% earnings growth you expect to pay a premium. With a current PE of 954 and a forward looking PE of 115, I think you would agree that there is plenty of room for a correction in this stock. Currently the stock sports an RSI rating of 79% which is at extreme nose bleed overbought levels and provides me with a fair risk to reward opportunity to hold a short position heading into earnings. With current expectations so high and in light of it’s hefty PE, anything shy of a meets could sent Salesforce.com down to the low 40’s in the blink of an eye.

Salesforce.com is scheduled to release earnings on Wednesday February 21st after the bell.

Disclosure: Author is short CRM.

CRM 1-yr chart

Comments

[Asif Suria:]

Interesting analysis Robert. It appears that the drop in net margins was primarily because they had to expense options. Based on insider sales, it looks like a large number of options were exercised once again in Q4 and we are likely to see the same effect on net margins when they report results.

Asif
SINLetter.com

2007 Feb 21 02:56 PM

[americanmeat:]

Robert,
I think you're missing the point. Ok, you might have made some quick cash after earning, but long run, you're gonna be broke if you're short CRM. Great companies offer consistent attention to their customers, enabling them with customization, great functionality, and reliable tech support. Sure, with a lot of hard work, these are easy to come by. What gives Salesforce.com its awesome potential is the budding ecosystem of complimentary applications to enhance the core product’s functionality. Individual incentives are at the core of the AppExchange, and sure, Salesforce.com will transfer some revenues to third-party developers by allowing them to sell their products, but in the long run, it will build durable monopoly power. As the ecosystem grows, Salesforce.com can offer that much more to its customers.

See a-days-pay.blogspot.co... for my whole post and more on CRM

2007 Feb 21 04:35 PM