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Salesforce.com (CRM) is a game-changing company whose stock has regularly traded at high valuation multiples. The enthusiasm for this company probably derives from its role as an industry leader and from how Salesforce.com is a movement unto itself. The company introduced the cloud computing concept to the information technology market before the term "cloud computing" existed. It pioneered the SaaS (software as a service) business model when most people only considered traditional purchase for their software needs. Salesforce.com was the Netflix (NFLX) of the business-to-business world years before Netflix became popular.

Unfortunately, Salesforce.com is priced much higher than other application software providers. The high price multiples of CRM stock should dissuade investors from buying until its valuations descend closer to those of its competitors.

Computing Future Valuations from Growth Projections

Investors should buy stocks trading at prices which make them good deals. A poor company trading at a dismal price may be an excellent trade. CRM shares are trading at the other extreme: Salseforce.com is a company trading at incredibly enthusiastic valuations which should be avoided. Its metrics are provided with other software companies:

 

 

Ticker

Company

Forward P/E*

Earnings Growth Est.

P/S

Sales Growth Est.

CRM

Salesforce.com

71.9

27.7%

7.9

35.5%

ADBE

Adobe Systems

20.9

10.3%

3.7

10.4%

SAP

SAP AG

17.5

11.5%

4.2

8.7%

ORCL

Oracle

16.1

11.8%

4.2

15.6%

MSFT

Microsoft

15.2

9.0%

3.5

7.6%

CA

CA Technologies

13.0

9.3%

2.5

4.1%

*Since the trailing CRM earnings were negative the forward p/e was used for all stocks

Salesforce.com posted a net loss for the trailing twelve months, so the firm's projected forward price-to-earnings ratio was used.

Do the higher growth estimates of CRM justify its higher valuation multiples? Future valuation multiples of CRM and its peer stocks were modeled by combining expected growth and trailing valuation multiples. Graphs of future price-to-earnings and price-to-sales ratios based on analyst earnings growth estimates and historical sales growth follows:

(click to enlarge)CRM Forward PE

(click to enlarge)CRM PS Analysis

These projections illustrate the absurdity of current valuations for Salesforce.com. Analyst estimates for faster-than-economic growth are not predictive after three years or so, yet somehow investors are paying prices for CRM shares which imply they can see earnings at least eight years ahead.

Estimated convergence years were calculated below for CRM and its competitors:

CRM Competitor

Forward P/E Equivalence

P/S Equivalence

Adobe Systems

2022

2014

SAP AG

2021

2013

Oracle

2022

2015

Microsoft

2020

2014

CA Technologies

2022

2015

The projected crossover dates span well into the distant future for the price-to-earnings multiple, demonstrating how CRM shares are overpriced. Investors should avoid Salesforce.com at current prices. Instead, they should consider other companies on this list as more reasonable alternatives which can be justified without extending forecasts beyond a 3-year horizon. In particular, CA Technologies is trading at better valuations which are attractive when contrasted with Salesforce.com. CA Technologies starts at much lower price multiples and its growth trajectory maintains its dominance over Salesforce.com for a decade based on forward earnings and three years based on sales projections.

Please read the article disclaimer.

Source: Salesforce.com Valuation Farce