Sunil Shah's  Instablog

Sunil Shah
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A fund manager who cut his cloth in Schroders London. He joined Coronation South Africa in 1998, running the Smaller Companies Fund which had the best 5-yr record in the sector during his tenure. In 2005 he left Coronation to pursue his passion in writing (and invest without constraints). He... More
My blog:
whitemansnumbers.com
My book:
White Man's Numbers: Excerpt Chapter 13
  • CRM At 40X Opertating Cash Flow, Price Target Of 101$. 40X Cash Is A Huge Multiple And Still Downside! 6 comments
    May 11, 2012 3:03 AM | about stocks: CRM

    Using real operating cash flow: excluding cash received for shares issued, and related tax effect; including deferred commission cashflow; subtracting real capex on servers, furniture etc (there's more for acquisitions but not a certain figure given a voracious acquisitive appetite):

    Here's my spreadsheet.

    Note fully diluted shares outstanding are now 149m, up by 14m in 1 year;

    Table lets you impute a cashflow multiple, add back net cash on balance sheet.

    I assume cashflow growth of 35% for f13 to jan13.

                           
    Cashflow for yr to jan12   368     ""=591-229+6   excluding shares sold and tax effect
    less capex     91     capex ex acqtn        
    Net cashflow     277                
    Grow at 35% 35%   373.95                
                           
    What multiple? 15X 20X 25X 30X 40X            
    Value 5609.25 7479 9348.75 11218.5 14958            
    Cash 777 777 777 777 777 cash + mkt securities less conv debtas at jan 2012    
                           
    Total value 6386.25 8256 10125.75 11995.5 15735            
                           
    Per share                      
    149 42.9 55.4 68 81 106   for 2011 sh 136 m, then moved to 149m!! For f13  
                         

    To summarise table below, a 40X operating cashflow multiple delivers a price target of 106$. 40x is ludicrously generous.

    I prefer a 30X and this delivers a price target is $81

    In other words, even after the slide on Thursday May 10th, there is ample downside risk once cloudy euphoric dreams are replaced with a dose of reality.

    Disc: short and relieved!!

    Disclosure: I am short CRM.

    Stocks: CRM
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Comments (6)
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  • Andrew Shapiro
    , contributor
    Comments (2186) | Send Message
     
    interesting analysis
    24 Feb 2012, 02:25 PM Reply Like
  • Bruce Whitaker
    , contributor
    Comments (406) | Send Message
     
    Part of the bull thesis was that revenue at any price was merely a precursor to future pricing power. My thesis included the supposition that rapidly evolving competition would eliminate future pricing power and cripple the company. I still believe this.

     

    One possible scenario is that rather than seeing economy of scale, CRM will find itself in the position of having to meet greater than expected capex as it struggles with overload and attempting to meet customer expectations. Two notable outages in the past couple of weeks may or may not indicate a need to beef up infrastructure or design. As I'm sure you've noted, the company is grossly overpaying for acquisitions while competitors cash hoards allow them to overpay with little overall financial impact.

     

    That said, I'm looking past CRM for my next elephant to short and haven't found any truly outstanding prospects. I've had good luck with NFLX and OPEN and expect CRM to fatten my speculative portfolio. Any promising short ideas with reasonable liquidity?
    11 Jul 2012, 05:01 PM Reply Like
  • Sunil Shah
    , contributor
    Comments (1086) | Send Message
     
    Author’s reply » bruce,
    BV is another ludicrously priced cloud play.
    but i cant borrow shares from schwab to short it.
    12 Jul 2012, 12:42 AM Reply Like
  • Sunil Shah
    , contributor
    Comments (1086) | Send Message
     
    Author’s reply » bruce i am currently short
    AMZN
    12 Jul 2012, 12:56 AM Reply Like
  • Bruce Whitaker
    , contributor
    Comments (406) | Send Message
     
    Agree with that as a good candidate. AMZN is definitely no longer a pure play and there just aren't that many spaces they can dominate outside of basic retail mail order. I definitely agree it shouldn't be priced where it is. Appears a hybrid growth/commodity/congl... valuation would be more appropriate. Wonder if it will fill the gap down to $196? There's a huge horizontal volume bar gap between about $208 and $200. Definitely a prospect worth getting educated on.

     

    Thanks
    12 Jul 2012, 07:59 AM Reply Like
  • Sunil Shah
    , contributor
    Comments (1086) | Send Message
     
    Author’s reply » oracle now a full cloud off premise suite.
    Microsoft's CRM dynamics is fully integrated into Office and is offered at a 40% discount to salesforce.com

     

    This will never turn a decent profit margin after accounting for all genuine costs, including worker compensation.

     

    They dont have any economies of scale. At a billion dollar revenue rate per quarter, they are barely profitable on GAAP.
    Where does a 17bn market cap come from????
    11 Jul 2012, 11:34 PM Reply Like
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