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Salesforce: Fairly Valued But Watch Revenue
Simon, thanks for the article.
I think the number of red flags for CRM would show that the company is very overvalued. In addition to the worrying signs that you mention above, here are some additional ones:
1) Negative Free Cash Flows: You mention correctly that the acquisition are eating free cash flows. Hence acquisition cost should be deducted from the free cash flows since those acquisitions are a source of revenue and free cash flow for CRM
2) CFO growth is slowing. (34% ttm), although the last quarter was 74%qoq and reassurring on that side, but the growth didn't make it to the net income line (the 2 precendents were -3% and +9%). This is very important because due to the revenue recognition, CFO will slow down first and then revenues.
3) Operating margin steadily decreasing for the last 7 quarters (join your point on SGA expenses). In order to pay such high valuation for the company i would expect and improvement of the gross margin (which is the case by a few points over the past few years), but the SGA/Gross margin ratio increasing, and more than compensate to the downside so both operating and net margin and decreasing.
4) Intangible assets / total assets jumping from 10% to 27% in a year. Potential risk of goodwill write off in the future, and for now the acquisition cost does not compensate for the cost in free cash flow gained by those acquisition.
5) Competition is there with MSFT, Oracle...
Too many red flags for me. At those levels i would expect perfect growth at least on the CFO & FCF, improving operating margin in order to see some earnings in the future. I think next quarter results will be key, let's see if the CFO growth is still high qoq & if margin improve. For now i don't believe in it at all given the numbers i see. I think the risk is low to be short.
I am short CRM via put options.
Jan 19 04:11 PM
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