Salesforce.com: Clearly Mediocre

Jun.28.07 | About: Salesforce.com, Inc. (CRM)

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

When Salesforce.com announced a ‘major’ development with Google (NASDAQ: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

    CRM