Seeking Alpha

Salesforce lower after analyst calls company his "best short idea"

  • Arete Research's Adam Shepherd is reiterating a Sell and $24 PT on Salesforce (CRM -3.3%), while declaring the cloud CRM software giant his "best short idea."
  • Shepherd thinks Salesforce's core software growth is slowing, and that the company is relying on newly-acquired ExactTarget to hit estimates/guidance. He's also worried about Salesforce's aggressive spending and cash flow pressures.
  • Concerns about spending and operating leverage already led Salesforce to sell off last week following its FQ3 report.
  • A few other enterprise cloud software names are also selling off on a bad day for tech momentum plays.
Comments (7)
  • Deja Vu
    , contributor
    Comments (1153) | Send Message
     
    Many an investor has been burned shorting Salesforce.com

     

    Its almost like magic - the duet between Cramer & Benioff each earnings evening and next day the shorts are hung to dry.

     

    Yet periodically somebody comes along and "discovers" that employees are paid in unexpensed stock options, salesforce.com is not making GAAP money, that a constant stream of acquisitions is fueling the revenue growth etc etc.

     

    It's so charming when a new bear appears, all I do is go "awwwww"
    25 Nov 2013, 02:55 PM Reply Like
  • WatchTower Research
    , contributor
    Comments (7) | Send Message
     
    Analysts have always been bullish though, which makes this news interesting.
    25 Nov 2013, 06:05 PM Reply Like
  • tommyleenyc
    , contributor
    Comments (29) | Send Message
     
    The only thing funnier than a valuation short on CRM for the past 10 years is a valuation based long on MSFT.
    26 Nov 2013, 08:30 PM Reply Like
  • Weighing Machine
    , contributor
    Comments (600) | Send Message
     
    Guess Arete's not a part of the union. Union shops keep CRM a strong buy
    25 Nov 2013, 03:01 PM Reply Like
  • anonymous20130909
    , contributor
    Comments (58) | Send Message
     
    2

     

    Arete's a part of a different union - the ones that sell research reports vs. get paid via brokerage commissions, investment banking, m&a...

     

    They write the opposite - sell where buy and buy where sell, else why would anyone pay for a research report!
    25 Nov 2013, 09:32 PM Reply Like
  • anonymous20130909
    , contributor
    Comments (58) | Send Message
     
    2

     

    This Research report oddly reminds me of a recent SA writeup:
    3 Simple Questions For Wall Street Analysts
    http://seekingalpha.co...

     

    Arete Research's Adam Shepherd is no different! WHY!

     

    Today, Nasdaq crosses 4000. A whole bunch of Fund managers are nervous that the market could correct. If an analyst pitched a long idea, his PM or CIO will not be very happy unless it's spectacular. If the market corrects, the analyst will get yelled at. So, his/her best bet is to pitch a short. Managers need to hedge their books and are looking for Shorts just in case the market drops and are telling their analysts: "I need short ideas".

     

    The easiest short ideas are the fundamentals driven hedge fund hotel ideas (where every other hedge fund is on it). Blackberry was a classic. Issue is: everyone is on it. The second is valuation driven. Even if fundamentals are strong, you can always find comps, historic multiple compression of other firms... Another safe bet. Truly unique, fundamental driven shorts (ahead of others) are rare and take a lot of guts.

     

    So, the best bet is to go with a Valuation short. While there are a lot of truly expensive (valuation/multiple) shorts, you need to factor liquidity, availability of borrow and market cap if you're going to pitch it to several firms. 1. Liquidity - big funds need liquidity - time to exit cannot be more than 1 day (1 day Avg. Daily volume max) - most often it should be much lower. 2. Borrow - new IPOs don't have borrow and ideas that are clear shorts have high borrow costs. 3. If this idea is going to be pitched at multiple funds, the idea needs to have size (big market cap).

     

    If you're a research firm like Arete, you need to have an idea that meets the above criteria to be able to pitch and get business. So, you figure out an idea that a camp of valuation driven PMs/Managers are likely to buy, out out a "deep analysis" driven report that the valuation driven Managers without much operational insights can bite.

     

    When you pitch it to a whole bunch of multi-billion dollar funds, even if a few act, it pushes the price down and you look like a smart guy. The ones who missed, are now calling you and maybe even playing catch up. A self-fulfilling prophecy.

     

    Chances are firms such as Arete are doing what makes sound business sense vs. a truly meritorious idea.

     

    Over the next few months, when other catalysts prove the analyst wrong, they can always talk about the irrationality of markets.

     

    Arete & their brethen are practicing sound business, not messiahs fighting for truth.
    25 Nov 2013, 03:34 PM Reply Like
  • PChan444
    , contributor
    Comments (372) | Send Message
     
    Arete and shorts are stupid. Long CRM! Follow Chan!
    Weighing machine is broken! Haha Lol. ...WM only look at valuation but forget we in bull market! need to think momo sometimes!! Follow Chan!
    25 Nov 2013, 03:39 PM Reply Like
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