Understanding Salesforce.com's Blast Off

Salesforce (CRM) announced profitability and at the time of writing was up around 16% over yesterday's close.(Click here for conference call.) Given a PE ratio that is north of 600 that’s pretty gutsy. While there are obvious improvements in this enterprise, why did the stock rocket up on this press release? Market expectations were not blown away by that much, if at all. A PE north of 600 and some guys still want to pile into this one. OK lets take a look at what the executives said.

The hyperbole starts right at the beginning. The press release headlines this statement “First Ever On-Demand Software Company to Exceed $850 Million Annual Revenue Run Rate”

The press release starts with a quote from the chief honcho which follows:

"Our fourth quarter and full-year results show that businesses are selecting the Force.com Platform-as-a-Service and cloud computing over failed client-server alternatives," said Marc Benioff, chairman and CEO, Salesforce.com. "There's only one way to describe both the consolidation of the industry and the growing number of companies choosing innovation, not infrastructure: The End of Software."

FY 09 EPS guidance is now $0.32 to $0.33. Given a 600 PE, that means a share value of around $200.Yes, revenues are increasing, but management is very quiet about what is happening with the cost structure. One would assume that costs could be leveraged and margins would improve.

Year over year revenues are up some 50%. Total expenses are up 46%. The synergies of scale are not becoming apparent.

Check out the insider sales during Feb. I am always suspicious when senior officers unload so close to earnings announcements. Management needs to explain this problem. They have been around for nine years and should be farther ahead in leveraging costs.

Comments

[Dave Malhotra:]

The explanation is quite simple. You hit the nail right on the head when you point to the furious pace of insider selling. Benioff has been selling 10000 shares a day since March 2005. At 60/share he is taking in 600k EVERY DAY!! So far he has pocketed 455 MILLION!!! Look at this: www.secform4.com/insid...
His second in command, Steve Cakebreak hasn't done so bad himself--raking in 18 MILLION.

Management #1 objective is to pump up the stock price so they can continue to sell. FOLLOW THE MONEY. Have they generated significant income since the company has gone public? Let's see:
Net Income (since going public)
2004 - 4 million
2005 - 7 million
2006 - 28 million
2007 - NOTHING
2008 - 18 million
TOTAL: 57 MILLION

So the company has generated 57 million but Benioff has pocketed 455 million and continues to get away with 1.2 MILLION every couple of days. Isn't it obvious what is going on here? Have all the analysts drunk the kool-aid?

Whether or not managment actually DELIVERS on promises of significant future profitability, it doesn't matter as much to their own personal financial situations. They've gotten the money out early. They've learned the lessons of the dotcom bubble well, but unfortunately, most of the analyst community and the investing public hasn't....Great post George

2008 Mar 02 03:47 PM

[CRMS:]

Seems like the market wil have a second look at this over the next couple days...much like it did after the initial euphoria surrounding AMZN's 4th qtr

2008 Mar 02 11:37 PM

[WHATISNEW:]

Beniof has been selling for years and it is no news. If he has not been selling, probably he will be ten times richer now! No use being jealous! You cannot fool all the people for all the time. Can you? The reason for the stock moving up is it is giving genuine service at throw away price!

2008 Mar 06 01:25 AM

[crossderry:]

Agreed...CRM can plausibly say that they're not seeing scale because of the platform play, but wasn't force.com supposed to leverage what they already had in place? Reducing transparency ain't a great sign...

2008 Mar 09 07:53 PM