Has Defied Gravity for Too Long

| About:, Inc. (CRM)
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Earlier today, I wrote that Microsoft (NASDAQ:MSFT) looks compelling at present valuations. I continue to think the rest of the year is going to be quite dicey given the significant geopolitical and domestic challenges. Given that outlook, I would like to take a look at a stock in the same sector that is from the vastly overvalued part of the market spectrum; (NYSE:CRM). I will be the first to admit that this stock has defied gravity for way too long in my opinion. However, with QE2 set to expire in less than three months; this stock could fall back to earth in the near future.
Overview:, Inc. provides customer and collaboration relationship management services to businesses and industries worldwide. The company also offers a technology platform for customers and developers to build and run business applications. The company has experienced rapid revenue increases as its on-demand / subscription model has been very successful and it is the market leader in its space. This has propelled the stock price to more than triple in price over the last two years.
Valuation: CRM is selling at approximately 110 times trailing earnings as well close to 100 times predicted earnings for the current year. In addition, the stock is priced at almost eleven times sales. While projected annual sales growth (25%) over the next two years is impressive, it hardly justifies these valuations in my opinion. The company's balance sheet is solid with net cash of approximately $10/share. However, the stock also sells at approximately 14 times book value, 40 times cash flow and a PEG of over 3.3.
Prognosis: The outlook for continued revenue increases looks to be solid for the foreseeable future, as the company is in the vanguard of firms surfing the on-demand subscription model wave. However, I believe the stock has gotten way ahead of itself. I have been saying this and been wrong to this point for some time. However, it is my belief that CRM and other high beta stocks have been primary beneficiaries of Quantative Easing II (QE2). When this program winds up at the end of June, these stocks should be highly vulnerable to a significant pullback.
Concerns: There are a myriad of items that concern me besides this stock’s ridiculous price to earnings ratios:
1. Increasing competition: This is a lucrative space for other major software firms to target, including Microsoft, SAP, and Oracle (NYSE:ORCL). The application itself is clunky. It tends to hang when you have other applications open, or have less than 10MBS of bandwidth. The mass email function is primitive and does not format correctly when sent to prospects that have Internet Explorer. Definitely room for a better mousetrap to come along.
2. Insiders: There have been over 230 insider transactions over the last six months, and they have all been “Sells”.
3. Consensus earning estimates for both this year and next have come down over last 90 days.
Conservative to Medium risk investors: Avoid
High Risk investors: Short

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.