The Salesforce.com Bubble is Ready to Burst

I will not say this is deja vu and feels like 1999 all over again, because I was not into stocks at that time. Having said that, I do know what a bubble looks like, and it's what I see when I look at Salesforce.com's (CRM) stock price and key statistics.

Salesforce.com, inc. provides on-demand customer relationship management [CRM] services to businesses and industries worldwide. Its Apex platform allows customers and partners to customize and integrate Salesforce CRM applications or build new applications. The company also offers AppExchange, an online marketplace for on-demand applications.

Agreed that its products are highly in demand and it has very little competition other than Oracle (ORCL), but is that enough justification for the stock to trade at a Forward PE of 200, and more shockingly, a PEG of 13?

Over the past few months, the message boards for CRM have been constantly inundated with messages from buyers saying the company is due for a buyout by Oracle or Google (GOOG). I think either of them is highly unlikely, because Oracle recently bought Siebel, and wont be looking to another acquisition so soon. As for Google, these rumors are completely unfounded, as Google has enough on its plate with the gPhone release due next year.

Here's something which should worry the longs in CRM: a look at insider trading over the past 6 months. If the management was even half as bullish as the investors, they would have shown some signs of confidence in the stock, by buying it at these levels. Instead, they have been dumping shares like there's no tomorrow. Now, I own Akamai (AKAM) too, and the stock has taken a beating recently. Nevertheless, the management team bought back half a million shares at 40+ levels, which gives me the confidence that they have their own money on the stock and they know its got a positive future.

With CRM, I am sure the sign is that they are making hay while the sun shines and getting out at the top. Smart work, guys!

The market is very bullish now, and the trend seems to be CRM's friend, but when the first signs of weakness come out, it will get plundered like never before. There have been stocks which rode the momentum wave and seemed like they would go to the moon, like Hansen Natural (HANS), NutriSystem (NTRI) and SanDisk (SNDK) to name a few. But as the stock goes up, the expectations go higher too, and just one miss is all it takes for it to plummet back to where it belongs in the 30's.

The funds are driving this higher so they can lure you into it and sell in blocks while you watch gaping. Before you buy the hype in the CRM stock, make sure you do your DD. You don't want to have a sad story to tell your grandchildren about the CRM bubble, do you?

Disclosure: Author has a short position in CRM

Comments

[doctortodd:]

You get it completely wrong on at least two counts. First, the real reason Oracle won't buy Salesforce is because the personal animosity between Larry Ellison and Marc Benioff won't allow Ellison to reward Benioff with a huge takeover premium. Second, the insider trading is Benioff selling his shares in even amounts over time, not every senior at the company unloading in advance of bad news. If you'd done your homework you'd know that, and could publish the executive breakdown and time of sales in your article. Instead you take a poorly researched jab. Sloppy. You might happen to be right about the PEG being unreasonable, but your research and reasoning are poor.

For the record:
www.secform4.com/insid...

2007 Oct 12 11:47 AM

[Prashanth C...:]

hi doctor
thanks for the comment. Lemme respond to it.

First off, I'm surprised you know the EXACT reason why Orace is not buying CRM. If that information is as solid as you think, CRM will not be rising the way it has been. And you cant really say personal rivalry would be the reason behind this. Thats naive.

Secondly, you're comfortable with insider selling, arent you? It does not matter if its the CEO or CRO selling, or if its all of them selling. The very fact that he has been dumpping shares ruthlessly shows what amount of trust he has in the future of the company, at least in the short-term. It would certainly spook me out if the CEO of a company I invested in was regularly selling shares at highs. That is definitely NOT a good sign, and everyone from Warren Buffett to Jim Cramer will tell you that.

Good luck

2007 Oct 17 03:19 PM

[Joe2:]

The animosity between Marc and Larry is a non issue in my mind. I do not buy that as a reason for not purchasing. Larry is way too focused on his company's success and if CRM fits in that plan, he would buy it. The more interesting question is does he need to, and if so why? Isn't it more valuable to consider an outright purchase of NetSuite (yes I know he owns a majority of it but due to conflict of interest, he cannot directly control what the company does or does not do).

Also, Marc Benioff's share sales seem to be a pre-arranged trading arrangement. He is selling 10,000 shares at roughly the same time, every day without exceptions. That does not seem like "dumping" to me...

2007 Oct 22 01:49 PM

[shortCRM:]

Agree with author 100% - company is unprofitable, valuation totally unreasonable (maybe, maybe would be justified if they would grow like Google, but they are not - it is CRM software after all), by the number of analysts and investor conferences they present at (can be found on their website) - they have very good marketing skills (and there are a lot, a lot of other profitable and even growing companies with similar market capitalizations and without such coverage). It is 100% SHORT.

2007 Nov 06 03:37 PM

[Prashanth C...:]

This company is nothing but PR...unbelievable, the amount of press releases they dish out, for every inconsequential thing.
Lets see how long they can keep it up.
See market up today but this stock is still down.

2007 Nov 06 03:44 PM

[Mark s:]

How is that short working for you now?

2007 Nov 16 02:24 PM

[Prashanth C...:]

If I were long, I'd be very worried about the action on the stock. Its being manipulated to a ridiculous extent, and the pre-earnings dump was an example.
I shorted on fundamentals, I cant believe you're so happy paying 56 bucks per share for a company that earns 5 cents a quarter. Good luck with that. Look at AMZN, RVD...this one is next.

2007 Nov 16 06:42 PM