Wednesday, June 13 2012 marked a significant technical breakdown in Salesforce.com (CRM) stock.
After gradually drifting towards the 200 day simple moving average, the stock defended it successfully four times before succumbing to the selling pressure, closing at $127.33, 2.7% below the current 200DMA.
Using the simple moving average crossovers are not extremely dependable guides but it appears that the 50DMA is arcing quickly down to meet the other averages. At the current pace the 50 will cross over the 100 within 2 weeks and, if weakness continues, we could see a death cross (50 falling through 200) within a month.
The RSI, MACD and Full Stochastics are not forecasting near term strength of much significance, the gates appear to be open for the short sellers to loot the joint.
Salesforce.com: More than a Mouthful
Of all of the bull cases for going long CRM, the one that makes no sense is the idea of a buyout. Bulls were calling CRM undervalued when it was at $160+ and mentioned them as a likely acquisition target for their competitors, citing previous examples like SuccessFactors for justification.
All of these calls for the imminent buyout of CRM forget the fact that it is almost an order of magnitude (10x) larger than all of the other cloud and social names that have been acquired recently.
Ariba - $4.3B
Successfactors - $3.4B
Rightnow Communications - $1.5B
Salesforce.com's Valution currently? $17.57B
Making a $1B-3B purchase when you have cash on hand is one thing, burning a large portion of your cash to buy a non-profitable company is entirely different. Let's look at the potential suitors and see how much of a chunk CRM would be (ignoring the normal 25% premium for buyouts).
Microsoft (MSFT) - $58.16B
Oracle (ORCL) - $29.74B
SAP (SAP) - $6.06B
IBM (IBM) - $12.39B
Just a quick glance would limit Microsoft and Oracle as the only viable candidates and last I checked both of these are actively building up their offerings to directly compete with Salesforce. Why would they be willing to completely reinvent their ecosystem to incorporate CRM products from an unprofitable operation?
Cash is King
Salesforce.com has a reputation for fuzzy math when it comes to their accounting. Whether it is changing their billing cycles to make deferred revenue jump, reporting all numbers in press releases using their non-GAAP earnings or changing the buzzwords in their quarterly reports, the company will do anything and everything to distract you from their non-existent profits.
Since bulls cannot point to any earnings on a GAAP basis (which have declined quarter after quarter for 2 years now), the new selling point is deferred revenue and cash flow.
Deferred revenue is going to be boosted on any year over year comparison until the 1Q2013 report. They doubled their billing cycle in 1Q2012 and that will artificially boost their growth rates until we are back to comparing apples to apples. Any comparisons from previous quarters will be off due to this change.
Cash flow is boosted inordinately by their use of stock options to pay their sales people instead of cash commissions. With the GAAP/non-GAAP earnings difference currently at $70M per quarter and growing, extrapolating that for the year and almost 50% of their $665M in operating cash flow is coming from employees being paid in stock.
While this could go on for quite some time, any market downturn that has salespeople refusing stock options in lieu of cash will see a drastic reduction in CRM's cash flow metrics.
Cloudy with a Chance of Waterfalls
Salesforce.com just experienced a significant technical breakdown. Further weakness is to be expected and I would expect CRM to head down to 120 where some support lies and would not be surprised if it reaches 110 in the near term.
Anything lower will require the large institutional ownership to begin to question their unwavering support of CEO Marc Benioff, the master salesman. Shorting now should be an easy play with a cover target around 120 for half and 110 for the rest would be my trade recommendation.
I don't recommend playing options on CRM as the premiums are normally too high, though July $130 puts at $8.85 look pretty attractive, especially if you peel them off as CRM heads lower. If you bought some at open tomorrow, I would recommend setting a stop at your loss limit and gradually removing them at $125, $120 and then letting the rest ride at breakeven playing for a drop to $110.
Ever since their earnings report in May, the stock has simply met with a wall of sellers. As a former seller (of the short variety) I wish nothing but luck for those willing to play CRM short. While the fundamentals of the company are being masked to a great degree by Benioff's dolphin influenced sales techniques, the institutional support for this name is rivaled only by Amazon (AMZN) with regards to valuation of a large cap company.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in CRM over the next 72 hours.