salesforce.com: Riding SaaS Growth to Increasing Profits

It has been known since the early days of management that consumerism is what drives capitalism. For any business, you provide a service which provides a utility for the individual who is seeking some form of satisfaction—either through the beauty of the brand [Ferrari] or, in Salesforce’s (CRM) case, the satisfaction of starting your own company at a low cost.

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Brief Background of CRM [SalesForce]

• Founded in 1999, and based in San Francisco California, Salesforce.com is the leading provider of hosted, outsourced CRM [customer relationship management] application software that is delivered through the web on a subscription basis [rather than the perpetual license model of most software vendors].
• With the launch of AppExchange and APEX, Salesforce.com has opened on-demand markets beyond CRM. As of FY2007, the company had revenues of $749 MM.

While there has been increased recognition that SaaS is sustainable and likely to be a pervasive trend, there are still firms who remain skeptical as to the SaaS penetration into the overall enterprise software market. Nevertheless, the strategic moves by industry players such as IBM (IBM), Salesforce, Google (GOOG) and Microsoft (MSFT) to invest in SaaS and PaaS technology have strengthened this technological progress.

The dramatically more economically efficient shift of SaaS application software makes SaaS a bigger generational improvement than what client-server architecture has had on mainframe computing. Fundamentally, SaaS provides an edge in application software due to technology usage [i.e. stack efficiency], improved success rate, higher ROI and innovation optimization.

The awareness of SaaS is growing and we see trends only increasing from here. A 2008 survey by McKinsey and The Sand Hill Group of 857 executives shows that respondents cite SaaS and SaaS platforms as the most important trends impacting their business, 62% believe that “software industry innovations over the past two years are nothing compared to the innovations we are about to see,” and that they expect to increase the proportion of their IT budget spent on software from 31% in 2007 to 35% in 2010.

Indeed, investors may quip that new rollouts by that of Microsoft may decrease margins but many users will argue the effectiveness of CRM [Salesforce] in their product offerings and execution. By comparing products, technologically savvy users [who are the demographic using this] will find that CRM wins because of the ease of use/intuitiveness and great marketing.

While MSFT’s tight integration with outlook is a big selling point, in action it seems less differentiated than what many users have come to expect [not uncommon for MSFT to blunder on a major revenue generating platform]. Overall this explains why CRM has over 1.1 million subscribers and is expected to surpass $1 billion in revenue this fiscal year, while MS Dynamics [MSFT] CRM online is still garnering limited revenues.

Disclosure: Long

Comments

[techy]

been hearing this since couple of years...but yet to see the earning growth.

crm is trading at 300 p/e, to even deserve their current price they need to grow earnings more than 10 times. or their stock has to fall to one fifth, what gives?

[Brandonf]

I think that people often get confused over the P/E and treat it as something thats sacred. When a stock gathers momentum PE's go very high, they go very low. Furthermore CRM has seen recent Revenue Growth of 52%, 50%, 48%, 49% and 55%, while EPS growth is 700%, 500% and 400%. Next year analysts expect EPS to grow by 130% and in 2010 they expect EPS to grow by 91%. This being the case it does not take to long to reach earnings that are ten times higher than the current number.

[techy]

yes they have grown earnings last three quarters because before that there was almost none to talk about.

its like saying that they grew 400%, when the truth is that their earning an year back was nothing.

as i said...i am waiting to see that explosive growth now that the expectation has already been built into the stock price.

what is the real barrier to a online application....give me 10 million and a year...and i will build you an exact replica of saleforcel.com

wait till the competition kicks in from oracle, Microsoft etc...

[User 215700]

Ironically, Salesforce.com is the only SaaS company that's impressing Wall Street investors this year, according to the SaaS 20 Stock Index, hosted on mspmentor.net. Most SaaS stocks are down sharply this year, and overall the SaaS 20 Stock Index is down 14 percent since January 1.

[p. smith]

User 215700, pump all you want... anyone has an ounce of gray material knows that Salesforce.com is a 100% gambling stock.

only suckers buy that kind of stock and only fool think it's an investment.