10 Reasons to Avoid Salesforce.com at These Levels

Includes: CRM, VMW
by: Bret Jensen
Another day, another interesting session in the markets. After rocketing over 2% yesterday, the risk trade continued for a second day. The best gainers were found in the NASDAQ and the Russell 2000. The Dow and S&P 500 underperformed.
One of hottest sectors in the market today involved those firms projected to benefit by the move to “Cloud Computing”. Both VMware (NYSE:VMW) and Salesforce.com (NYSE:CRM) continued their recent large runs by adding another 7% in today’s market. Salesforce in particular looks priced for absolute perfection at these levels and might be approaching a good area to initiate a small short position.
10 reasons to avoid CRM at this price:
  1. Stock is priced at more than 154 times trailing earnings.
  2. Of the 291 insider transactions in the last six months, ALL were sells representing 12% of shares held by insiders. If insiders were selling starting in the 60’s earlier in the year, do you want to be buying in the 90's?
  3. Although net income has increased over 400% over the last two years through last fiscal year ending December 2009, operating cash flow has only increased a little over 30% during same time period.
  4. Stock is selling at over 8 times trailing annual revenues.
  5. Price action and appreciation that is being driven by the Cloud Computing story seems eerily similar to the valuations achieved during the height of the internet boom of 1999.
  6. Net income seems stuck between 19mm to 21mm over the last four quarters despite significant revenue gains.
  7. SAP (NYSE:SAP) will be launching a competing product during this summer.
  8. Stock is selling at 10 times book value.
  9. Consensus earnings estimates for this year and for 2011 have come down over last ninety days.
  10. Stock is selling at 90 times consensus earnings for this year while only projected to achieve 30% revenue growth.
Given this, I would avoid this stock as it seems very susceptible to a significant pullback at these valuation levels. For more aggressive investors, a short position might be warranted. Be careful out there.
Disclosure: Short CRM