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For some time now we have heard Marc Benioff and many Wall Street analysts propound on the great prospects of Salesforce.com (NYSE:CRM). This has gone on for more than five years now. At some point one has to say, "Enough!" With the current world economic problems, that time has come. It is time for investors to say, "Put up; or shut up!" to Marc Benioff and Wall Street. It is time to sell CRM. If you are an aggressive trader, it is time to short CRM.

The trend in the net income (GAAP) data for Salesforce.com over the last several years tells the real story for CRM. The last three years data are listed below.

Year ending January 31,XXXX

Annual Net Income

2010

$80,719,000

2011

$64,474,000

2012

($11,572,000)

The trend is strongly downward over this time. To get a look at the latest data, the quarterly net income data is in the table below.

Quarter ending date

Quarterly Net Income

July 30, 2011

($4,268,000)

October 30, 2011

($3,756,000)

January 30, 2012

($4,078,000)

April 29, 2012

($19,475,000)

Each of the last four quarters all have negative GAAP earnings, and the latest quarter was down by far the most. This is at least partially due to the significant economic slowing in Europe, which is one of CRM's major sales areas. Notably CRM lost more in Q1 2012 (the quarter ending April 29, 2012) than it did in all of FY2012 (the year ending January 30, 2012). In a short amount of time we will soon see that CRM is going to lose a lot more money in FY2013 (the year ending January 30, 2013). This will finally put the lie to Benioff's boasting. He won't be able to ignore losses in the $100+ million area for the year. Amazingly adjusted income on Yahoo Finance still shows CRM making an expected $1.49 per share for FY2013. With 138 million shares outstanding, this amounts to adjusted earnings of $205.62 million. How does Benioff justify adjustments of $300+ million without any major changes to the business occurring? At some point even the most bullish investors in the "cloud" , are going to acknowledge that CRM is not a hugely profitable business with a bright future. When it is clearly a big money loser, this should be easy for even the most die hard bull.

CRM is competing against some of the biggest and most successful companies in technology. A lot of these were late to the cloud party, but they may have planned it that way. Often major corporations plan to be the third or fourth big entrant into a market so that they can avoid some mistakes that are made by others early on. Then they try to move up from there. Benioff's pompous boasting has not planned for this. Companies such as Microsoft (NASDAQ:MSFT), Oracle (NYSE:ORCL), IBM (NYSE:IBM), SAP (NYSE:SAP), and others tend to be slow and lumbering. However, they are huge machines with even bigger lists of enterprise contacts. IBM has been serving US businesses for 100+ years. CRM has been doing this for little more than 10 years. CRM cannot hope to match IBM's great enterprise relationships list, no matter how many sales people CRM hires. It cannot hope to match Big Blue's long term built up trust. Eventually CRM will have to win customers with a clearly superior product.

Does CRM have a clearly superior product? From a purely engineering standpoint you would have to say no. CRM has made a practice of expanding its offerings with new cloud products from fledgling companies it has bought out. It has then kludged these products into its enterprise relationship management product offerings. From the users I have talked to, they are increasingly less satisfied with CRM's products. They find them cumbersome, complex, and increasingly harder to learn.

There are many technical and other problems with this approach (see the list below).

  1. The products have no overall architectural design. They are not designed to work together, so they often don't. This also makes it harder to acquire an overall design in the future.
  2. The products often use different languages, different design methodologies, etc. It is hard to integrate such programs smoothly into a major offering as CRM attempts to do. This leads to frustrations both for the engineers and for the customers. It makes these programs much harder and more expensive to maintain.
  3. The diverse products in CRM's offering(s) do not have a consistent user interface because many have been developed by separate companies (at least at the time of development). This makes them much harder for the user to learn and to understand. The customers do not get to learn one consistent interface. They have to learn many. The consequent frustration level of CRM's customers will eventually be a big negative for the company, if it isn't already.
  4. Since many of the engineers come from companies bought by CRM, they often cannot move easily to other groups within the company. Each of these groups may be using different technologies (see the above three items). This increases training costs in the long term.
  5. Many of the engineers joined their startup companies with the expectation of earning a lot of money via either stock or stock options when their company went public. If they vest when CRM absorbs them, they may start looking for their next opportunity (leave the company). If many of CRM's employees have been used to making large amounts of money via stock or stock options as the stock has risen over the years, they may leave if the stock stops climbing. CRM is now down -4.15% year over year. This is not rapid growth. Many employees could leave due to an abrupt cut in overall earnings. There are a lot of startups that are probably better bets for future earnings. Since many of CRM's employees came from startups, they may philosophically prefer that work environment; and they are likely to return to that environment. Their likely high level of attrition will lead to much higher training costs for CRM. There is some evidence that this is already occurring.
  6. The lack of a consistent user interface will help the bigger companies that do this well gain customers at CRM's expense. IBM, ORCL, MSFT all do this better than CRM. All have many more long term, enterprise customer relationships. Logic says they will be able to take business away from CRM in the future.
  7. If CRM chooses to address the inconsistent architecture(s), methodologies, languages, and interfaces issues, the engineering process will be a long and expensive one. The companies starting later will not have these problems, or they will have much slighter problems.

CRM has one other big problem. It has hired a lot of new salespeople recently. CRM's stated intention is to grab as much of the cloud market as it can before the many new and often bigger players can become consequential in the marketplace. Unfortunately for CRM, the EU crisis is pushing the world economy into a slowdown or a recession. This will likely prove to be a good year for cutbacks instead of huge new labor forces. Hewlett-Packard already announced layoffs of 27,000 employees. Others are sure to follow. In CRM's case this will likely be the year propagandized huge growth turns into huge "real" losses. Someone has to pay all CRM's sales people. The world market does not seem to want to do it this year. The world market likely will not want to do it next year. Will CRM fire a lot of the salespeople? If so, will it then have to pay to train new ones in two years time? CRM is caught between a rock and a hard place. It will be fighting this quandary as it loses money. It may lose even more money as a consequence.

Other bigger companies will have long term money to pursue long term strategies. IBM, ORCL, MSFT, SAP, etc. will spend these next tough two years catching up technologically. Then they will be ready to take CRM's business away when the world starts buying strongly again. Even the most bullish analysts on Wall Street will soon be forced to see this. Events may be conspiring against CRM's stated strategy; but the events are "reality". Ultimately companies have to live with their realities, no matter how unfair or unpleasant. CRM would have encountered these same realities in time. The EU crisis has just moved up the date.

The two year chart of CRM provides some technical direction for this trade.

(click to enlarge)

The slow stochastic sub chart shows that CRM is neither overbought nor oversold. The main chart shows that the price line seems to be trying to breech the 200-day SMA. The 50-day SMA has turned down toward the 200-day SMA. The two year chart shows a double top or perhaps a triple top formation. This puts strong technical pressure on CRM to move downward.

Given the current situation in Europe, the weakening economic indicators in the US, Brazil, India, and China, etc., CRM seems almost sure to head downward, barring huge infusions of stimulus from the Fed or from Congress over the very near term. If you own it, it would seem wise to sell it. If you are an aggressive trader, it is likely a good time to short it. It has some support at $120, some at $110, and some at $100. The strongest support of the three is at $100. This is by no means the limit of a down move. This stock could easily trade at $10 given its current fiscal fundamentals. When this hot air balloon pops, the air may go out of it very quickly.

On the other hand this week is the end of Q2. Consequently it is possible that many fund managers will be doing "window dressing" on their portfolios. Many stocks have been known to go up undeservedly during this time. When they are highly shorted stocks such as CRM, which has 11.30% of the float short interest, they can easily be short squeezed upward. Since both institutions and insiders have been selling CRM, it seems less likely that this will happen. Still averaging into a short position is a good idea. Since CRM does not pay a dividend, CRM is a cheap short.

Good Luck Trading.

Source: A Look At The Net Income Trend Tells You That Salesforce.com Is Headed Downward