Sunil Shah

Salesforce.com: Absurdly Overvalued

user 221132, see my previous notes on CRM's moderating revenue growth and traction rate. Sales are clearly decelerating.

Also, how the street reconciles a company on a 118 trailing PE (FPE to Jan 11 of 76!) and a hurdle for sales growth for this quarter of 17% YOY is simply beyond me.

They may well beat the street consensus for this qtr (results 17th Nov), but it sure as hell doesnt justify the valuation.

Looking to short more post results. Go big or go home, as the swamis say on the banks of the Ganges -:)

Solid Execution Makes Western Digital a Compelling Stock

Windows 7 will lead to a material shift in HDD sales, as enterprises upgrade PCs, last done in 2001 for XP. The stars are aligned for this industry, especially since the demise of Fujitsu as a HDD supplier. Rising ASPs is something unheard of!

STX has excelled in botching it up (see my note on STX board: 'Questions for the Board'), whilst WDC has powered away, consistently maintaining a high ROC and gaining market share in selected areas. If you want to listen to a pedigree CC, listen to WDC's last quarter--these guys are good. very good.

My biggest single holding.

Microsoft: Free Cash Flow Analysis

Thanks for response Peter. But the answer to your question: "The question I ask every company I analyze is "how much return (in percent) in FCF are you going to give me for every dollar of total capital you invest?"

...would be seriously distorted for a company with significant cash on bal sht- particularly when two yrs ago it earned 4% and now close to 0... and these nos obviously reduce the FROIC.

Pl oh pls use this methodology for msft, and lets see what the real P/FCF is. It should be a relatively simple adjustment to your work.

thank you!

Salesforce.com: Absurdly Overvalued

The momentum mojos are right in one respect: a value approach can predict, with reasonable confidence WHAT will happen, not WHEN it will happen. But guys, the ultimate criterion will be based on rationality (as it was during the 99 dotcom frenzy, as it was in homebuilder stocks); reason will prevail and reason clearly dictates this stock has run two maybe three years ahead of itself, in an future environment as fickle and as capricious as a cloud!! Can you say with reasonable conviction SFDC will maintain its 35% rev growth rate for 3 years? IN THIS TOTALLY TURBULENT CLOUDY WEATHER? Time will tell, lets talk in two years. I will weather the rain until then.

Microsoft: Free Cash Flow Analysis

nice work Peter!. but doesn't msft have net cash per share. do you subtract this from invested capital (ie enterprise capital). then you should do the calc above(strictly speaking, less interest earned on cash) to get FROIC and just subtract the cash per share as per bal sht from share price to compare valuations over time. Right? Your opinion would be appreciated. And your work again using this methodology!!

Why Is Marc Benioff Presenting at Oracle Open World?

I think it highly improbable that Oracle buys CRM. Why?

-L Ellison holds a personal stake and there would be huge dissent from shareholders
-It would negate Siebel acqtn, where ORCL has spent millions reconfiguring it as a SAAS entity also.
-The ridiculous premium on CRM's valuation, which can only be justified due to the takeout rumours flying about for the past 2+ years.

There is almost no way. The Oracle expo will finally unveil all the hype and the underlying reality of CRM. That's why it has been granted a pole position. But share keeps rising as half-baked rumours keep circulating. Market will take care of this in time.

Why Is Marc Benioff Presenting at Oracle Open World?

I think it highly improbable that Oracle buys CRM. Why?

-L Ellison holds a personal stake and there would be huge dissent from shareholders
-It would negate Siebel acqtn, where ORCL has spent millions reconfiguring it as a SAAS entity also.
-The ridiculous premium on CRM's valuation, which can only be justified due to the takeout rumours flying about for the past 2+ years.

There is almost no way. The Oracle expo will finally unveil all the hype and the underlying reality of CRM. That's why it has been granted a pole position. But share keeps rising as half-baked rumours keep circulating. Market will take care of this in time.

Terex to Benefit from Increased Infrastructure Spending

The Fantuzzi acquisition is the biggest blunder I have encountered in years. Mgmt could have walked away, with no penalty, but decided on some 18th century notion of integrity, they would jeopardise the entire company and proceed to buy a loss making entity that represented almost 20% of their entire market worth. Loved the company and its niched foray into infrastructure, but with bozos like that in command, Terex is destined to become a T-Rex during this downturn.

Watch out below.

3 Stocks to Put This Global Crisis in Perspective

US might be the largest manufacturer, but I believe the answer to your question, 'who is the world's largest exporter?', is Germany. Check your facts as I will mine....

Looking to Invest in Bonds in Troubled Times? Caveat Emptor!

Hello Joseph (and I like your moustache!) I am very interested novice in bond funds- the desperately low money market rates warrant it! Question: what do you think of the following ARK PSL. I guess my criteria should be discount to NAV and the fee ratio. Any other criteria you would recommend?

Another important question: I am a non US resident. If I buy the fund via your former employer (ie your mate Charlie Schwab), is the distribution taxed at source (at the 15% rate?) or does the recipient receive it gross.

Thank you for your time

Salesforce.com Slides as Cakebread Quits

Now why would you sack three top people from your primary division, immediately after a year-end with tough sales targets? Then: Listen to Ellison on Oracle’s earnings announcements, where he makes no less than six references to Siebel wins over CRM in the quarter. This incidentally is the enterprise division where 3 people, (including the former highly regarded CFO!!) were ‘removed’.

Pure conjecture, but CRM’s top honchos may have abruptly and shockingly discovered a shortfall in either sales or more likely the deferred revenue balance at year-end. It’s a big jump/ask from last year, when Dell was added.

Salesforce had already undergone a reality check in the Oct 08, quarter, when their deferred revenue balance didn’t meet expectations. Why is this important? Well the revenue line only tells part of the story of their customer success-the bookings made and related to that specific quarter. Whereas the change in deferred revenue reflects more of the customer success story, relating to contracts sold but due in future periods. So the overall ‘customer success’ rate would be captured as an addition of quarterly revenue and the change in the deferred revenue over that quarter. This would give the true customer traction over the quarter, and a year on year comparison would give a real growth rate without any seasonality, clearly a factor for the company.

So here’s the customer traction rate: revenue plus change in deferred revenue balance in the quarter, for the last few quarters, on a yoy basis.


Jan-07 Apr-07 Jul-07 Oct-07
Cust Traction 56.9% 48.0% 46.0% 44.3%


Cust T Jan-08 Apr-08 Jul-08 Oct-08
70.9% 36.1% 34.3% 25.9%




Few observations:
-The January quarter is always a bumper, probably because long-term contracts are booked at the end of a calendar year.
-Jan 08 was a quarter where the force was truly with them and produced a 65% growth rate, along with a 30% share price lift in the following three months- Thank you Dell for the big boost! Now all we have to do is beath that hurdle.
-This is clearly a company with decelerating customer traction. Although the sales growth for Q3 was 43%, the real customer success story, the customer traction has moderated substantially to 26%.


So now what does bend-my-ear-off Benioff do, in light of the recent key staff ‘removals’? Well the easiest way to stem the selling tide would be to preannounce sales for the January quarter- before real fear seizes his share price. But he cant. Why? Because they are about to miss, either on revenue or (IMO), the deferred revenue balance.

Still lots of room to go, shorties, enjoy the ride. Time for the valuation to re-enter earth’s atmosphere. About Feb 27th for results if last year is a guide.

Disclosure: I’m short. Surprised?

U.S. Debt Default, Dollar Collapse Altogether Likely

On 5 Feb, Mr Richmond wrote:

Here's something to make you even more humble: you obviously have no idea how the bond market works or what QE means. When the Fed buys Treasuries it does so specifically to cause long rates to fall, and prices to rise, by increasing demand for them. It does this by printing money and using it to buy Treasuries. And while 2008 may have been the first year when this was done in such a scale, it will not be the last; the US federal budget deficit is projected to be $1.3 Trillion in fiscal '09, and that doesn't include any 'stimulus' bill, so tack on another $800 Billion. Over $2Trillion will need to be borrowed by the US alone; China just went into deficit, BOJ just announced it is going to start buying securities, and with oil at $40 the ME doesn't have much surplus to 'invest'; practically all nations now need to borrow for deficit spending. There just isn't enough money to go around. So where will all this new 'capital' come from?

My Response:

A little less rich air and more humility would serve you well. You make a cardinal error of confusing Govt budget deficits with Current Account deficits. China is still generating a huge CA surplus, as are Japan and indeed the Middle East (where the marginal cost of producing oil is about $15), and whether it appeals to your sensitivities or not, these surpluses are being recycled back into $ assets.

Whether it is direct buying by Govts or the private sector or sovereign wealth funds, they are buying $ assets, including US Treasuries. This symbiotic relationship has prevailed and grown over the last few years and there is still no practical alternative. So next time you visit any emerging country, ask them what their preferred asset as a store of value might be, and ask them where they would like to store their current account surpluses. I suggest you do it soon, before markets oblige you to drop the prefix "Rich" from your poor name.

As an aside, have you considered the velocity of money along with the quantity. You do know they both drive inflation, and relative currency strength should reflect the combination. The paralysis of credit markets has caused a (yet) unquantifiable drop in US money velocity and it will be a while before they thaw. So even if there has been an exponential increase in US money supply, currency markets are telling you overall quantitative money is not an issue with the $.

Your humble poor teacher

U.S. Debt Default, Dollar Collapse Altogether Likely

A humble observation that refutes your admittedly plausible conclusion: In 2008, the year par excellance of quantitative easing, when Federal Reserve Bank Credit exploded from $1Tr to $2.2 Tr (ie issued more liabilities in one year than the cumulative total since time immemorial), why did the US 10 yr Treasury yield actually decline? (4% to 2.4%)

Surely if this monetary explosion presages a default, bond investors would demand a higher premium to hold this 'risk-free' asset. Dollar doomsters have predicted 10 of the last dollar crashes in the last decade; alas there has been one minor correction.

In my humble opinion, the problem is: what is there to crash against. Gold? Too tiny to replace the greenback as the global store of value. Real estate or hard assets? Rather yours than mine. The Euro? Sure if we can find any constancy between increasingly divergent EU states, some on the verge of default themselves.

Tis a skewed world indeed, where apparently obvious conclusions merit much closer scrutiny.

Earnings Surprises for U.S. Steel

Well spotted squire! Not a single professional "anal liced'' seemed to notice. But in P&L and cash terms its not relevant. Why? The 2bn additional booked liability refers to the hole they now have on their defined benefit pension obligations (employees are guaranteed x when they retire and current assets in pension fund replace, 0.7x say). So over the next few years, that hole has to be funded through the P&L and cash. This was reflected in an increase charge this year, and they have a number of years to fund the entire 2bn hole. In fact in a period equal to the maturing of pension obligations.

When (i say when not if) markets recover, this 2bn debit will erode away with the rising Net Asset Value of the assets in their pension fund.

Hope that helps!

Sunil

Salesforce.com: Pricey and Coming Down Fast

'Paradigm shifts' have one nasty drawback- the shifter usually ends in the garbage heap. CRM has surprisingly managed to keep share price above 30 in this equity meltdown, the only rationale being its cashflow (the pe OF 100 simply could not have survived this carnage). BUT that cashflow does not account for all the shares they issue to staff (it actually adds to cash) to retain them, in lieu of normal salary. Well, now most of the recent options are under water (price down about 40% ytd and falling) we'll see how secure their people are, and how much more old-fashioned salaries they have to pay. Force.com is wonderful for young trendy software people who cant get into the mainstream, but how many applications will be commercialised? Its laughable, they tout their new alliance with facebook and its 127m users- tell me dear bend-my-ear-off, how do propose to convert facebook into commercial dollars, have you any idea what facebook people do and do you think they are willing to pay for it!!! shareprice will be below 15 by year end. I'm banking on it!!