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Wim Dankbaar
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See my entry on Linkedin http://www.linkedin.com/profile/edit?trk=tab_pro Owner jfkmurdersolved.com Broadcast Media industry 2003 – 2011 (8 years) Overveen owner/director Stickerstation Benelux Entertainment industry 2000 – 2003 (3 years) Amstelveen... More
  • What's The Price/Loss Ratio For Salesforce.com? 3 comments
    Feb 29, 2012 11:16 AM

    Many of the analysts covering Salesforce.com are either not suitable for their job or simply dishonest. Anyone with a brain should know that 12 month price targets of anywhere between 150 and 225 are irrational and unrealistic.

    Let's face it, in a year from now the best scenario is that this company will have revenues of 3 billion, losing half a dollar per share. With 136 Million shares outstanding, and growing, that is a full year loss of 70 million.

    It already has market cap of 20 billion, which is unprecedented high for a stock with revenues under 3 billion. It is provably the most overvalued large cap stock on Wall Street. Is that really provable?Well, just name me one stock with revenues less than 3 billion that has a market cap more than 15 billion. There is none! The only one is Salesforce.com. You would think such a valuation is for a company with awesome profits, ....... but no, it is bleeding money at the bottom line.

    Anyway, a price target of anywhere between 150 and 225, would add yet another 1 to 10 billion to the already inflated market cap. Deutsche Bank for example knows very well that a stock with 3 billion revenue (and losing money) is never worth 30 billion, unless it has some unattackable monopoly for an unmissable product demanded by an enormous market. This is certainly not the case for Salesforce.com, which is just a vendor of a service that is supplied by many rivals. These analysts are pumping up the stock price. Their Wall Street friends holding the stock may profit from that, the average main street investor is likely to suffer.

    You can also see that they are lying by consistently quoting a forward PE of 60 to 100, while they know full well there is no such PE. This forward PE of 68 is even quoted on Yahoo Finance (under Key Statistics). We are led to believe that Salesforce.com will have considerably higher profits in a year from now. We can only call it what it is: a LIE!

    That PE is based on NON GAAP Earnings, but the trailing PE will always be based on true GAAP earnings, which will be negative this year. You see, a year ago the forward PE was also 60. So how can we have a trailing PE of 9500 now? .......... Because the trailing PE is based on true earnings (GAAP). True earnings have just become losses. So in a year from now, you will see a PE that is not 68 but Not Applicable or N/A. You cannot have a PE when there is no E. Maybe it's time to intruduce a new metric: The Price/Loss ratio. The forward PL for Salesforce.com would be around 280 now.

    To realize the insanity of this stock's valuation to its fullest, you also can add that a 10% rise in stock price represents a rise of 2 billion in valuation (market cap).

    So last friday a revenue "beat" of 7 million, achieved at an increasing loss per share, was rewarded with more than 2 billion addition to the already highflying market cap. 7 million = 2 billion. Let me rephrase: 7 million = 2000 million. If that's not crazy, I don't know what is. That is more than the entire yearly revenue of this bleeding company. And based on that some analysts are trying to sell you that the company will be worth up to 10 billion more in twelve months.

    The rise was probably also due to panicking shorts covering and to CNBC's Jim Cramer pumping the stock with CEO Marc Benioff to a huge audience of retail "investors". "Mad money" is indeed a well deserved name for that program. To emphasize NON GAAP earnings while real earnings are losses, is nothing short of deceit. I guess the public is deceived easily for their money.

    On top of that, nothing has really changed in the company, and certainly not for the better. Revenues may have risen a little more than expected, but the company is now losing money per share for the first time. And worse, these losses are forecasted to grow significantly. To more than 50 cents per share for the full year.

    There was a lot of euphoria over the seemingly grown amount of deferred revenue and big transactions, but as Paulo Santos has pointed out in this article and this article, this was only due to new accounting shenanigans. In reality deferred revenue decelerated instead of accelerated. It is all a matter of make believe. Meanwhile the company is enjoying an utter state of denial by its followers. If the company had reported 625 million revenue, exactly in line with estimates, the stock would probably have tanked 10 %. What a difference 7 million dollar can make in valuation. Four billion to be exact.

    Then there is the legitimate remaining question when and how the company will start making money, if ever. This question was astutely addressed by Todd Sullivan in this article. We know it won't be this coming year, and very likely not the year after. For all we know it may be worse the year after. No guidance was given for further ahead than fiscal 2013. It is flabbergasting that this question is not answered, but even more that a stock is rising as a reward for greater forecasted losses in the future. History shows that such an irrational imbalance will not last. The answer to this question is important. After all, the value of each company is ultimately determined by its ability to make money for its shareholders. The company does not answer this question, other than there won't be profits for the next year or two. So what is this pot of gold that believers see at the end of the rainbow? There must be one, right? Maybe we can get a hint from a Salesforce fan who posted the following under the nickname Saaspaas:

    "Now think about what happens once those salespeople become productive, i.e. generating more than they cost. They are selling a subscription-based software license. They will get paid a nice commission upon the original customer sales, but as those customers renew there is very little sales and marketing expense involved."

    My reaction:

    I don't follow this. First of all, you assume that existing customers will automatically stay on board. That is not a sure thing in an increasingly competitive arena with Salesforce.com offering the most expensive solution of them all. Twenty years ago I used WordPerfect for wordprocessing and 15 years ago Netscape as my browser. Altavista was my favorite search engine. Microsoft is already offering incentives to Salesforce customers to switch to their solution.

    Secondly, are you suggesting that all those salespeople being hired now (and creating revenues at a loss for the shareholder) are going to be laid off when the growth comes to a halt? If not, you would not cut their costs, would you? Besides, for the reasons mentioned, I think they will keep needing those salespeople to keep the existing apples in the basket. Unless they slash the price of their product. Neither is positive for the already negative bottom line.

    Read this recent article.

    Investing in this stock at these price levels is plain dumb or a bet that a majority of fools will fall for this deceit a little longer. A bet that the bubble can hold still more air before it bursts. A bet against sanity. Like swimming to the other side of a river full of crocodiles. Like skiing on a slope with the highest avalanche alert. You know the avalanche will come, but you bet it won't be while you are on the mountain. It has nothing to do with rationally estimating future value for your hard earned money.

    Disclosure: I am short CRM, OPEN.

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Comments (3)
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  • outcastsearcher
    , contributor
    Comments (1374) | Send Message
     
    Wim, I understand and generally agree with the thrust of your article.

     

    However, I don't think "Wordperfect" is a good example of good technology gone bad. Wordperfect was destroyed by corporate IDIOTS (Novell) who:

     

    1). Bought Wordperfect (which had legendary customer service -- and thus a VERY loyal customer base who were willing to pay a premium price for such support).

     

    2). Hollowed out the support, to try to wildly increase profits at "no cost". (You have to wonder what "visionary genius" thought THAT would end well!)

     

    3). Predictably, this enraged their customer base, who left in DROVES -- giving up and going with competitors like MSFT Office (i.e. Word), where at least they were getting what they were paying for. I was one of those MANY customers.

     

    4). Sold Wordperfect for (roughly) 10% of what they bought it for several years later, given the vastly eroded customer base.

     

    5). (Conjecture, knowing how Wall Street seems to work) -- left, taking $millions in golden parachutes and ill-gotten bonuses for completing their part of this "project".

     

    ...

     

    I've seen this happen repeatedly. I happily bought/used "Conner Peripheral's" PC tape drives, which had good support, usable English documentation and error messages, and durable performance -- until some company (Seagate if memory serves) bought them and destroyed them. (There weren't even worthwhile competitors to migrate TO -- Iomega, for example, was a TOTAL joke in terms of support, error messages, etc).

     

    Your observation about rapid change and unpredictability in the computer world is valid. Your Wordperfect example is so weak as to detract from an otherwise useful article. (Just one man's opinion).
    1 Mar 2012, 04:41 AM Reply Like
  • jeffgra7
    , contributor
    Comments (79) | Send Message
     
    Ya, but at least management is buying shares hand over fist...wait
    7 May 2012, 02:44 PM Reply Like
  • ConvertClassic
    , contributor
    Comments (254) | Send Message
     
    But the company is amazing, isn't it? I hear there will be a new ETF that only buys amazing companies.
    24 Nov 2012, 07:33 AM Reply Like
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