As an investor from The Netherlands, I remain amazed about the huge wild swings, up or down, that stocks can make on Wall Street. They are truly much bigger than in Europe. It is obvious to me that American investors are much more driven by sentiment and emotions, rather than valuations. They also appear to be more driven by the opinions of analysts.
That is a quite peculiar phenomenon because the majority of analysts are generally more wrong than right. Many studies have been published on this, including ones that showed a chimpanzee throwing darts at stocks had better results than the average analyst. In general it is my opinion that the average investor may find better information for rational investment decisions, short or long, on a website like Seeking Alpha.
The hypes of today are cloud computing and big data, which is becoming a crowded field with recent and upcoming IPOs like Splunk (SPLK), Palo Alto Networks (PANW) and Service Now (NOW) Cloudera and Workday at valuations that boggle the mind.
More established companies in the sector are Netsuite (N), SAP, Oracle (ORCL), Microsoft (MSFT), IBM and Salesforce.com. This last company is generally marveled at by analysts as the undisputed leader and fastest growing star in the field, deserving a 25% higher valuation in 12 months, representing an additional 7 billion to the current marketcap of 20 billion.
To illustrate what I mean by huge wild swings, Salesforce.com (CRM) has fluctuated its market cap over the last year back and forth between $11 and $22 billion, while the company's revenues grew roughly $1 billion at increasing net losses.
Much has been written on Seeking Alpha about Salesforce.com, mostly by fact crunching authors not subscribing to the bull case and arriving at different conclusions than these analysts. These authors include myself as can be witnessed here and here. I agree fully with those authors ringing alarm bells despite still growing revenues of Salesforce.com. Simply because these revenues are achieved at a growing, but understated expense of the shareholder.
These expenses represent the following issues:
- Accelerating negative EPS/GAAP net losses.
- Accelerating stock based compensations for employees, increasing the share count, diluting the shareholder.
- Accelerating decline of cash flow.
To the prudent investor these issues should be cause for grave concerns. Fuel is added to those concerns for the following reasons:
- No clarity from management as to when these trends will stop or turn around.
- Continued focus on Non GAAP earnings, that even management had to revise downwardly in the latest earnings report.
- Less than truthful statements that cash flow is rising.
Hence, where management and analysts are cheering the rise of cash flow, there is in fact an opposite development going on.
The crux of these problems are accurately described in this Motley Fool article by Keki Fetakia: Should you buy into CRM's growth story?
As well as in these articles by Todd Sullivan:
I would like to add the following comments: "An Overvalued Company is Not a Fraud." - Very true, but that is not the point.
The point is that a company who focuses on NON GAAP earnings, at the same time suggesting that real earnings (which are accelerating losses) do not matter, is less than open and honest to its investor community. The same point is true for a company that adds stock based compensations to its cash flow. You could argue that a company is entitled to present its results as positive as possible without breaking the law. Salesforce.com may still fit within that margin, but "fair play" is an entirely different animal.
So the real issue I have, as excellently described by Seeking Alpha author Mark Cabaniss, is with the analysts assisting in this scheme, instead of pointing the finger to the worrisome developments and questionable accounting.
Just another little detail on the marriage of Salesforce.com with the analyst community: Piper Jaffray brought the news that Salesforce.com had scored its biggest deal in history. I have not seen clarity on that alleged deal in the earnings conference call.
But that is a side matter. My point is: The company itself declined to answer on the rumor, citing its "quiet period" before earnings. So if Salesforce was not entitled to leak such information, how come Piper Jaffray knew about it? They added that the deal was "unexpected", indicating management as the source. The evidence suggests a deliberate leak to prop up the stock price. I question the coincidence that the news was met by huge insider sales, the largest over the past year.
As Todd Sullivan (yes, him again) points out, it was also met with a filing to sell all of the 184 million worth of shares, issued to the owners of recently acquired Buddy Media: Even Buddy Media Folks Don't Want CRM Stock.
Institutional support is fine, but misrepresenting company results is another matter. Remember Enron? The thesis that Lee Harvey Oswald killed JFK has a lot of institutional support too, but that doesn't mean it is true.
Stock based compensation expenses are climbing from $84 to $99 million next quarter and to $382 for the year. When will investors grasp this is diluting them massively and hacking equally into real cash flow and profits? "GAAP net loss per share is expected to be in the range of ($0.75) to ($0.72)". With 140 million shares outstanding (and growing) that is about a 100 million net loss.
$382 million stock based compensation is about 20% of total cost of revenue. It should give thinking investors chills on their backs.
From the conference call:
Q3 FY13 Guidance: Revenue for the company's third fiscal quarter is projected to be in the range of $773 million to $777 million, an increase of 32% to 33% year-over-year.
GAAP net loss per share is expected to be in the range of ($0.27) to ($0.26), while diluted non-GAAP EPS is expected to be in the range of $0.31 to $0.32. The non-GAAP estimate excludes the effects of stock-based compensation expense, expected to be approximately $99 million, amortization of purchased intangibles related to acquisitions, expected to be approximately $27 million, and net noncash interest expense related to the convertible senior notes, expected to be approximately $6 million. EPS estimates assume a GAAP tax rate of approximately 37%, and a non-GAAP tax rate of approximately 35%. The GAAP EPS calculation assumes an average basic share count of approximately 142 million shares, and the non-GAAP EPS calculation assumes an average fully diluted share count of approximately 151 million shares.
Full Year FY13 Guidance: Revenue for the company's full fiscal year 2013 is projected to be in the range of $3.025 billion to $3.035 billion, an increase of 33% to 34% year-over-year.
For the company's full fiscal year 2013, GAAP net loss per share is expected to be in the range of ($0.75) to ($0.72) while diluted non-GAAP EPS is expected to be in the range of $1.48 to $1.51. The non-GAAP estimate excludes the effects of stock-based compensation expense, expected to be approximately $382 million, amortization of purchased intangibles related to acquisitions, expected to be approximately $95 million, and net non-cash interest expense related to the convertible senior notes, expected to be approximately $24 million. EPS estimates assume a GAAP tax rate of approximately 30%, and a non-GAAP tax rate of approximately 37%. The GAAP EPS calculation assumes an average basic share count of approximately 141 million shares, and the non-GAAP EPS calculation assumes an average fully diluted share count of approximately 150 million shares.
To add a final point, consider this: Many of those analysts, some of whom have a direct or indirect vested interest in the company, give this stock a 12 month target price of $200.
If a stock price of $150 is a market cap of $20.5 billion, a stock price of $200 is a market cap of roughly $27 billion. So what they are in fact saying is that the stock should be worth $7 billion more in 12 months. The truth is that $7 billion alone would already be a rich valuation for the company as a whole as 2.5 times the revenues is actually quite lofty for a stock that gives its shareholders ongoing dilution and increasing net losses.