Ed Porter's  Instablog

I mean, seriously, who are they kidding ?  

When asked about earnings guidance for FY 2013 at the earnings release on 17 November, we are told that they have "great visibility" on revenue, but that is "easier than working through all the detail of the P and L and cashflow".

What ?   A $17 billion cap company (well, before it went for 15% post-results) is not able to prepare a 1 year P and L forecast because it contains "detail" ?   Man, if I was a shareholder, I'd be rather hopeful they had a 10 year plan, let alone a 5 year plan, let alone a 1 year plan, but, no, even that short term horizon apparently is too complex for the company to portray.

But hey, that's OK, isn't it, because as Salesforce tell us "we've never provided that guidance".

Ask yourself this.   "If this company was highly profitable, do you really think for a second they would still decline to give earnings guidance ?".

Yet again, we are told next years revenue will show impressive growth.  But the problem for shareholders is that none of it is translating to the bottom line.  In simple terms, everything they are earning is being doled out in employee related expenses.

The inconvenient reality for the business model that Salesforce operates under, is that a fall in stock price, in itself, is enough to threaten the very viability of that model.  In simple terms, employees will still receive stock as compensation, but they won't be able to sell it for as much, and so their overall package has declined.
The only way the company can keep things on an 'equal footing' is to issue even more shares to employees, which acts to even further dilute shareholders. 

So, Salesforce very much fits the bill of a company whose own interests are greatly served by a high shareprice. That means, in turn, that they go out of their way to keep that shareprice pumped up as high as possible.    The problem is for Salesforce that they have now hit a major inflexion point in that the street now wants to see some hard profitability, and the company, unfortunately seems quite incapable of delivering it. 

It seems likely we have reached the last quarter or two of the shareprice being totally deluded, before the true re-rate comes - one which more fully reflects the total absence of underlying profitability.

At that point, one of the questions, amongst others, will be "how well can Salesforce retain its, um, salesforce, with its shareprice at, say $50 ?".   The answer, as I see it, is "It will not able to, except if it (likely) decides to accelerate the rate of shareholder dilution by issuing ever increasing numbers of shares".

The silly thing is, you barely even need to know what Salesforce actually is or does, in order to know that this company's business model is simplistically and ongoingly transferring wealth from shareholder to employee - on a massive scale.

When, and if, the company actually starts making GAAP profits (yes, they are the ones that matter, by the way), the sheer amount of stock that will share in those profits will mean an EPS which in no way justifies the current shareprice or anything close to it.   Some might even say "Man, if they can't turn a GAAP profit in FY 2013 or perhaps even FY 2014, then, um, shouldn't the shareprice be perhaps no higher than $20 ?

Salesforce may have good products, Salesforce may be a market leader, Salesforce may be well run.   But none of that automaticlly means it is therefore a stock you need to own.  In simple terms, if you want to be involved with Salesforce, you want to do it as an employee rather than a shareholder.

If you are the latter, I regret to inform you that you barely even register in terms of what Salesforce actually, truly, really care about.









Disclosure: I am short CRM.