Salesforce.com Cannot Defy Gravity Anymore

| About: Salesforce.com, Inc. (CRM)

Summary

Salesforce.com continues to impress the market with a strong surge in revenues.

Investors need to ask: How long before the company becomes profitable?

Several points indicate that the stock may be a good exit at the current level.

Salesforce.com (NYSE: CRM) has been scaling new heights consistently as the market rewards the company for posting phenomenal revenue numbers. Even as the overall market scenario turns ugly, the stock shows strong resilience as it trades at $69.50, off roughly 16% from its all-time high.

But, for all the reasons discussed below, I'm "extremely cautious" on the stock. And investors, existing and potential, should look into these before they make their next investment decision pertaining to the world's fastest growing cloud enterprise.

Salesforce's Free Cash Flow Needs To Be Understood Well

The market is being too generous toward the company which recently posted a FCF (quarterly) of $37.87M. I would totally understand if the market appreciated the stock following increasing FCFs. But the latest free cash flow figure is at a four-year low, and for a company like Salesforce, it is hard to call what the next figure will be.

I have always believed that the market doesn't like uncertainty and tends to sell off in such circumstances. The bulls have indeed remained very patient, pushing the stock price higher and higher, but their patience and strength can be painfully tested in 2016.

Another reason why I believe that the free cash flow figure may be hiding something is because the company states it as a non-GAAP measure. This gives the management an unwatched, uncontrolled liberty to distort figures. Also, the company has been forcefully focusing on non-GAAP data, stating that competitors also do it.

For the quarterly period ended Oct. 31, the company's FCF figure was derived by omitting certain expenditures, which could have lowered the value by a big margin. Salesforce (NYSE:CRM) in its Fiscal 2016 Third Quarter Results states that,

"The capital expenditures balance does not include our strategic investments, nor does it include any costs or activities related to our purchase of 50 Fremont land and building, and building in progress - leased facilities."

With this method of presentation, the company has the freedom to mark up or mark down the FCF data, which cannot be in the best interest of the stockholders.

Management Fails to Provide Clarity on Deferred and Unbilled Deferred Revenue

Apart from the free cash flow figure, another thing that irks me regarding the management is how it keeps us in the dark about the deferred revenue and unbilled deferred revenue.

The Company states,

"We present constant currency information for deferred revenue, current and noncurrent to provide a framework for assessing how our underlying business performed excluding the effects of foreign currency rate fluctuations."

I must point out here that the market needs a time period for a fair and most accurate assessment of the business, and the management always keeps that part hidden.

For the deferred revenue data shown in the image above (source: Q3FY16 Report), the statistic has been cleverly stated as current and non-current. Current normally refers to time periods of less than one year, so that is acceptable. But for the non-current deferred revenue data, I believe that investors would immensely benefit from a detailed revenue structure on the basis of time horizon.

The company states unbilled deferred revenue as the "future billings under our non-cancelable subscription agreements that have not been invoiced and, accordingly, are not recorded in deferred revenue." While it lends comfort to some extent with the non-cancelable clause, it is still not helpful given that there is no information from management as to how far in the future this revenue goes. Therefore, investors and the market will never know when the unbilled deferred revenue will actually get recorded as deferred revenue, making it even harder to value the stock.

Apart from business analysis stuff, this data also holds importance as the value has ballooned from $5BN in July 2014 to $6.7BN in October 2015. And going by the trend for the past several quarters, this value is unlikely to go down.

Could it be a trap? It definitely could be.

You Are Buying While the CEO is Selling His Stock

Yes, you read that right. While the market is going gaga over the stock, the CEO and several leading officers have been using the buying frenzy to offload their shares.

Upon taking a look at the latest SEC filings of the company under the Statement of Changes in Beneficial Ownership, we find that Marc Benioff (CEO), Maria Martinez (President, sales and customer success) and several other senior management officers are booking out of their common stock.

If the biggest stakeholders in the company are consistently selling their claim, it is definitely a red flag for the investors.

Conclusion - Exit or Stay Away

No matter how you look at the above points, it is hard to form a positive view on the company. If understood completely, these points only make investors nervous about the future of the company which is unprofitable even after 15 years of existence.

The argument for the non-profitable case can be that the company has been using the cash generated to expand, but investors need to quickly see some money before their patience runs out. They haven't been paid any cash dividends, and going by the management commentary, there won't be any for the foreseeable future as well.

So, my best advice to investors would be to either exit the stock when they can or select other valuable stocks to put their money into. There are things, crucial things, which remain hidden from the general public. And such a story very rarely ends well.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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