Here's what I would have asked if I could get on the Salesforce (NYSE:CRM) earnings call. It is a pretty simple question, really, and the convoluted answer that would follow would enlighten a ton of people to the absurd valuation of this stock:
“Great job on the most recent quarter gentlemen, the first cloud company with > $2B in revenue is a real accomplishment. My question is, when and how are you going to actually make money? Especially enough to even remotely justify the company’s current valuation?”
Pretty simple, right? Now Bennioff & Co will instantly spout off their “non GAAP” earnings or “earnings when we exclude costs we don’t want to count” like stock based comp expense etc and their revenues growth. The problem is, that really doesn’t matter. I was asking about GAAP earnings, gentlemen, you know, the ones that are cratering?
Seems like a simple question but it really isn’t. Why?
1- We have to expect revenue growth to slow. It has, too -- law of large numbers. Growing revenues at a $300M company 30% means $90M a year. Doing it on a $3B company means $900M…more than a little difference. So, if revenues are going to slow, the “growing our way to profitability” meme starts to fade.
2- If/when revenue growth slows, then CRM will have to raise price to make money. Except, that will be easier said than done because with Oracle (NYSE:ORCL), Microsoft (NASDAQ:MSFT), etc making a strong push into the space, there will be decided pricing pressure. More entrants into a business does not = higher prices.
3- Costs. CRM has said repeatedly their excessive SG&A expense has been due to the hiring and training of sales staff. It is clear that those activities are only generating more sales, not profits. So, when growth slows, should we expect layoffs?
4- CRM will say profits will come from cross selling different platforms/services within their products. Well, have we seem any evidence this is true to date? Salesforce has made a flurry of deals the last few years and we have seen just the opposite in every category from margins to profits.
Let’s pretend we go back to the glory years of the FY Ending 1/31/10 and say CRM matches that year in FY ending 1/31/2013. Than means NI of $80M on 135M shares for a whopping $.59/share 220 PE). I got news for people: a company that in its best year earned $80M is in NO WAY worth the $17B CRM is currently valued at. Oh yeah, the EPS for the last twelve months (not counting the Q released today) was $.02/share; …that's “two cents” or $2.7M. That PE =6500….
If I wanted to sell you my company and told you that you would make $2.7M on the investment a year but it cost $17B to buy it, would anyone in their right mind out there do it?
Growing revenues while losing $$ isn’t really that impressive. If I stood on the corner and sold $5 bills for $4, I’m pretty sure I would sell more and more each day, grow my “revenues” while I lost more and more money. The real trick is selling that $5 for $5.50 and making money.
Bottom line? All the deals and fast talk of revenue growth at all costs has only caused the bottom line to materially deteriorate.
Disclosure: See disclaimer.