Salesforce.com: Clearly Mediocre

Salesforce.com (CRM) is going down to $30. Here’s why:

When Salesforce.com announced a ‘major’ development with Google (GOOG) in late May, the stock surged on hype. The fact that the details of the partnership with Google were less than impressive did not deter CRM from trading in the high $40s range. After all, the stock has been climbing mostly on hype. Take a look at recent news on the company, and its full of conference presentations, speeches, and nebulous awards. The CEO and CFO have been doing a fabulous marketing job and Wall Street analysts have been eating it up. The substance of the company, however, is not as peachy as these headlines make it out to be.

It is amazing that a company with a P/E ratio of 3,660, yes three thousand six hundred sixty, can be adored for so long. Even with an optimistic growth outlook, forward P/E is at 150...what a bargain! Now imagine the wonders an economic slowdown will have on CRM’s stock performance. Every time I look at this chart I feel I am living in bizarro world. In fact, I started to adapt to the bizarro rules (society is ruled by the Bizarro Code which states, "Us do opposite of all Earthly things!”) When the stock hit close to $50 on May 30th, I became really happy, finally it has hit a pinnacle, and has no where to go but down. By June 25th, it was briefly under $40.

I will give Salesforce.com credit where it is due, they have aggressively pursued their clientele and the number of subscribers they are attracting is allegedly growing at a healthy rate. That is the good news. The bad news, is that both Oracle and Microsoft have been aggressively pursuing their own versions of Customer Relationship Management. Oracle has fifty software versions for CRM solutions. What does this mean for Salesforce? Well about the same thing that Wal-Mart means for your local JC Penny; Its not going to go out of business, but its going to lose a heck of a lot of business. Not to mention all that price competition.

To support the above, take a look at the earnings consensus for the 24 analysts covering this stock. This past quarter, Salesforce brought home 8 cents per share. Not too shabby considering they made virtually nothing all of last year. Next quarter the consensus shows eight times less than their previous quarter, one cent, and the next three quarters combined hope to bring in seven cents.

So lets recap.

CRM software is a nicely bundled address-book / report generator / forecaster package that is becoming an ever competitive field among powerhouse companies like Oracle and Microsoft.

Salesforce is absurdly priced in the $40 because of a misunderstanding of what “mutually market and promote the use of Google AdWords along with Salesforce's customer relationship management platform” really means.

In an economic downturn, small and medium sized companies will shy away from intricate CRM software and choose to continue using their Microsoft Office Suite or a combination of other software.

At 3,660 P/E ratio and PEG ratio of 77, CRM does not deserve such a high price tag. Currently at 13% below the 52-week high, it will surely continue to drift lower.

Disclosure: The author of this article has a long position in MSFT.

CRM 1-yr chart

Comments

[scdub]

Normally I do not reply to uneducated comments like this. If there's anyone out there surfing the net for tips on what direction stocks will go, please closely note this man's name "Dmitriy Vilenskiy". As I type this the value of the stock is around 45 Euro. Wrong call Dmitriy. You join a short but very undistinguised line of individuals who do not know what they are talking about.

1. "CRM software is a nicely bundled address-book / report generator / forecaster package that is becoming an ever competitive field among powerhouse companies like Oracle and Microsoft."
Salesforce.com has by far and away the best online CRM system in the world. There has never been anyone in their league at any given point in time. They've been taking business off 'powerhouse' stodgy companies like Oracle and Microsoft for years now. No other company played a larger part in destroying Siebel - which was the largest CRM company ever. Salesforce.com has since launched the AppExchange - this now has about 600 different applications and over 250 partners selling their products off it - from Adobe to bigmachines to Google - companies of all different sizes selling all kinds of hosted services - from financial services to project management to web conferencing tools. This is what's changing the nature of the software industry.

2."Salesforce is absurdly priced in the $40 because of a misunderstanding of what “mutually market and promote the use of Google AdWords along with Salesforce's customer relationship management platform” really means."
Absolutely Incorrect. The stock had been above 50 USD and moved in the range of 40 to 50 before any rumours had arisen. Google is a miniscule part of what Salesforce.com does. That partnership, however, will strengthen in the future. If you cannot see that then you do not understand the markets these 2 companies operate in.

3. "In an economic downturn, small and medium sized companies will shy away from intricate CRM software and choose to continue using their Microsoft Office Suite or a combination of other software."
Really. So how come it was launched in 1999 and showed stellar growth right through a time when new dot coms were dying like flies. Again your pseudo-analysis bears no relation to reality and hard facts.

4. "At 3,660 P/E ratio and PEG ratio of 77, CRM does not deserve such a high price tag. Currently at 13% below the 52-week high, it will surely continue to drift lower."
Are you really trying to educate people with this? This is a company with 646,000 subscribers (paying individuals) and over 30,000 customers (paying companies). The company was founded in 1999. Whoever is paying you to write this should find someone a little more intelligent - to put it mildly. Again your pseudo-analysis is deliberately misleading. The 52 week range is 21.64 to 50.43 (as it was when you published this diatribe). The current price is 45 USD (

[scdub]

To finish that comment: The current price is 45 USD i.e. just under 11% short of the 52 week high and almost 208% ABOVE ITS 52 WEEK high. Analyse that Dmitriy!

[scdub]

Actually I meant to say 208% above its 52 week low. Luckily pseudo-analysitis is not infectious so i'm correcting the typo here.

[George K]

SCDUB, LOL your ad hominems were certainly entertaining. "I type this the value of the stock is around 45 Euro" WHAT??? 45 EURO?!?!

Simply ignoring P/E ratios is just as laughable as your 'analysis.' The fact is that at some point companies like Yahoo, Ask Jeeves, and many others were trading at 1000 P/E ratios and we all know what happened next. Paying subscribers is not enough, you gotta bring revenues.

The fact that this stock is 200% above its 52-week low, can certainly be viewed as indicative of its overvalue given its earnings. As for uneducated comments, I see no value in your pseudo analysis...

[scdub]

I don't think you've added anything to the discussion there George. Please go away and waste your time in chatroom or somewhere else worthy of your discourse. LOL

[the teller]

CRM's valuation is simply impossible to comprehend. 60% YoY revenue growth and no earnings is by no means justification for p/e 3,500. They should produce revenue growth of 200-300% YoY for the current high valuation. They had negative cash flow in 2007. ???? What a nonsense. They are selling the idea of a 'new paradigm in Customer Relationship Management' to investors. While the paradigm shift is indeed happening it is not obvious why Salesforce.com will be the absolute winner here.

All longs including Institutions are HOPING that Salesforce.com will all of a sudden 5 fold its earnings and in the meantime senior management is unloading its shares by the millions. This company is walking on a tight rope above the Niagara Falls.

[scdub]

Again this is just opinion with very little analysis.There have been no major spikes in management selling off shares - its been spread out since they went public. My initial reaction was to the 1st post. Basically this individual made genuinely misleading statements. Its a matter of opinion whether stock is undervalued or overvalued. I believe it is the former - but I do not think that to hold either view is ludicrous. The market decides the value at any point in time and we can all be wise but none of us get it right all the time. Hence a stock valuation is rarely ludicrous - its all about timing and revelation. I've been listening to these objections for the last 5 years and everyone who talks the stock down has been proved incorrect thus far. However - my objection is to individuals with vested interests deliberately misleading the public and Dimitriy has a vested interest in CRM and also in a competitor, MSFT.

[the teller]

scdub, you must have an investment theory better than saying CRM has been going up in the last few years. For me companies like CRM are a big DO NOT TOUCH. I just can't predict this stock. I can't make a valuation on it, I don't understand what drives it. Looking at the chart over the last 6 months its going up and down like the skyline at the rocky mountains. Makes no sense. Good luck betting on this one.