If it sounds to good to be true, it usually is.....
This is the thought that creeps in the back of my mind when I listen to the speeches and conference calls of Marc Benioff, the CEO of Salesforce.com, a company active in the glamorous field of cloud computing, which is a red hot sector on Wall Street, much like like the dotcoms were 11 years ago and the solar industry was 4 years ago.
I am short on Salesforce.com (tickercode CRM) as this is how I see it:
- Stock has a bubble valuation of 8 times revenues and no profits.
- Stockprice has risen 400% over 2 years (at current shareprice, 600% at old time high of 160).
- Revenues have only risen 70 % in 2 years.
- Valuation is based on nothing more than a "belief" that the company will emerge as a highly profitable marketleader in its industry.
- While this expectation is far from reality, and doubtful to say the least, the stock is already priced for it.
- History shows that most stocks with such characterics have collapsed.
- Earnings per share have swung to a loss this quarter.
- Earnings per share are forecasted to decline further.
- Reaction to last earnings was a 10 % drop of stockprice.
- Next earnings are projected to be worse.
- Profit/Earnings Ratio (NYSE:PE) , the basic ratio to measure valuation (with an average of 25 in the industry) is now above 600, expected to grow to 10000 over next quarters.
- Investors still seem to grudgingly tolerate a PE of 600. Will they also tolerate a PE of 10000?
- No barriers to competition.
- Company offers the most expensive product in its market.
- Yet has extremely low profit margins, relative to industry.
- Agressive (price) competition announced by big name, cash rich players as Microsoft, Apple, Google, SAP and Oracle.
- Insiders are selling.
- Spending on marketing, personel and new headquarters looks irresponsible.
- Stockprice is in a clear downtrend, having lost 35% from the top.
- Recent allegations of questionable, controversial, manipulative accounting.
- Employees are rewarded with stock, causing dilution for shareholders.
- The more the stockprice falls, the less feasable this "stock based compensation" becomes, causing a real competitive disadvantage.
- Likelyhood of a new economic recession is increasing. Usually stocks that are considered overvalued, drop faster in a recession.
- In last recession the stock dropped from 73 to 22 (while it was still making profits).
- The heralding of CEO Marc Benioff by the media, reminds of David Wetherell of CMGI, 11 years ago. The mature readers will remember its flagship, search engine Alta Vista. Like Salesforce.com it was considered a prime mover in a new market. Like Salesforce.com it acquired companies left and right against insane prices. Like Salesforce.com it was not profitable. Like Salesforce.com its CEO was considered the smartest businessman of its time. Like Salesforce.com it held the promise to investors to become hugely profitable at some unspecified date in the future. On Wikipedia we can now read how that future unfolded:
The company was founded in 1986 as CMG Information Services, Inc. by David Wetherell, who was formerly the company's Chairman. The company's initial public offering was in 1994. CMGI's December 2006 market capitalization was $662.4 million. CMGI's stock boomed in the dot-com bubble of the late 1990s, peaking at $163 in 2000, for a market capitalization of more than $40 billion. The stock crashed heavily when the bubble burst, falling below $1 in 2002. As a result, the company was forced to cease its acquisition spree, sell many of its investments, and reduce other costs such as the naming rights to CMGI Field, home of the New England Patriots.
On 29 September 2008, CMGI officially changed their name to ModusLink Global Solutions, with the change of ticker symbol to MLNK taking effect on 30 September 2008
Disclosure: I am short CRM.