Jump On The Rumor-Inspired Dip

| About:, Inc. (CRM)
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CRM shares off by more than 5% today on rumors of a significant customer loss in the last quarter.

CRM shares are off by more than 18% since the start of 2016.

Anecdotal checks suggest that Salesforce enjoyed another unusually strong quarter.

I expect significant upsides in bookings, backlog, revenues end EPS compared to current consensus estimates.

The company is continuing to develop strong sales momentum and to significantly expand its addressable market by enlarging its product footprint.

The shares of (NYSE:CRM) are down by 18% so far this year and they are down by 15% since I proclaimed it my best large cap idea for 2016. Not the best of recommendations, thus far.

Obviously a piece of that performance is the market decline the first month of trading. And that decline has focused on names in tech that are considered to have high valuations and even more specifically focused on companies that sell cloud based solutions. Salesforce ticks all of those boxes and today the shares are under special pressure because of a rumor that the company has lost a large deal.

At this point, with the books closed on the quarter, anecdotal checks have suggested to this writer that the company's Q4 that ended on January 31st, turned out to be a halcyon quarter overall for the company. Of course no one I chat with has global visibility and people who chat about the industry often have axes to grind, but I think the consensus I have heard is that has enjoyed a truly remarkable quarter. I would be surprised if this company didn't lose some large deals. CRM is a big company now with an annual revenue run rate approaching $8 billion and at that size it is inevitable that the service they sell will displease some users and that some competitors will be particularly aggressive in pricing specific deals.

That being said, I think that their results will show a very impressive list of wins including one of the largest if not the largest of the Telecom companies in central Europe, a number of banks both in this country and in Europe and a breakthrough deal in the regulated utility area that apparently displaced an installed and functioning SAP (SAP) installation. Unlike some of the other software vendors, I believe that business for CRM was strong in both their European and Asia/Pacific regions with over attainment spread around the globe.

Another contributor recently published an article regarding CRM that focused on its cash flow and other sub-headline operating metrics. I tried to address some of those issues in the piece I wrote back early last month. Rapidly growing cloud companies are not going to generate lots of cash - and the more rapidly they grow the less cash they are going to generate. Like every other cloud vendor, CRM needs to build out lots of infrastructure and the higher the company's growth the more infrastructure it has to build. It would, I suppose, be happier for investors if the asset CRM has created, i.e. its service agreement and the associated infrastructure needed to execute the service agreement, was located higher up on the balance sheet as a receivable or better yet as cash. But the fact remains, from a financial perspective, CRM will be collecting rents off its operating assets for many years to come and its balance sheet is not a reflection of that phenomena. CRM has an asset base that is going to be able to generate cash for a decade-it will be able to produce far more cash as an installed service provider than many observers either credit or are willing to believe. CRM shares are not denying gravity at all; for cloud software companies gravity needs to be redefined.

Looked at another way, it is my belief that CRM created lots and lots of assets last quarter and if that turns out to have hobbled reported cash flow it is a good thing-investors ought to want to see this company maximize ACV signings and to the best of my knowledge that is precisely what took place. Cash flow and particularly free cash flow, are simply not the appropriate way to analyze cloud software companies; if investors and observers feel the need to remain in denial of that point eventually the world will turn such that the validity of the observation will become evident.

I think that the reasons for CRM's success are still not totally evident to many readers and investors. I tried to comment on the company's technology, and particularly on its multi-tenant architecture, in my prior report; some readers supported what I was trying to point out; others didn't. Multi-tenant architecture, however, is but one of the secret sauces offered by CRM.

I think another point I ought to make is that the company has extended its footprint far beyond its roots in sales force management. Even users, apparently, do not appreciate the breadth of what Salesforce can offer these days and its sales training stresses its enterprise capabilities as well as the specific benefits of its particular solution offerings. No, it doesn't offer a full suite or anything like a suite of ERP applications. And there are users who believe strongly that buying integrated solutions is the right strategy. But over the years the company has simply extended its offering so that it really is not about just sales force any more. Its offering include what it describes as its Service Cloud, its Marketing Cloud, its Analytics Cloud and even offerings that are not really mainstream such as its Chatter and Community Cloud as well as nascent offerings for clouds such as that based on Internet of Things

Another key point to me is that I think many investors simply don't realize the extent to which many users are thrilled to consume a flexible service such as is offered by CRM and don't want to buy and own software. Because CRM offers its customers services, and not software, it is frequently in a position to achieve one month turn around between the time a user orders an installation and the time the installation is installed and starts to operate. It isn't as though there aren't situations in which owning software might not make sense for the particular circumstances of an individual user. On the other hand, one month installations of complex application software are unknown in the on-premise world.

And finally something more intangible than the rest of the above factors is the company's flexibility and openness to new processes and new ways of doing business. CRM has the flexibility to negotiate large deals in weeks rather than months and is far easier to do business with, at least so far as I can determine, than its stack competitors. Most users really appreciate that in a software vendor and it is a hard culture to maintain.

The company announced today that it had promoted its VP of Sales, Keith Block, to COO. Mundane, ordinary-perhaps but the fact is that after a long and successful career at Oracle, Mr. Block has instilled the best elements of that culture while retaining the factors that have made doing business with CRM unique.

It is my belief that the 5% share price decline seen thus far today in the wake of rumors regarding the company's loss of a customer have set up an ideal situation and a favorable entry point for a trade or an investment. I would recommend taking advantage of the enhanced risk/rewards of the shares at current levels.

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.