Is Salesforce an Outperform?

With shares of Salesforce.com (NYSE:CRM) trading at around $174.46, is CRM an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Salesforce is an interesting story. The most interesting aspect of this story has been stock performance. Other than the financial crisis of 2007-2009, this stock has been a freight train. For years, many people have claimed that the stock is too expensive. Right now, the forward P/E is currently 89.47. With unimpressive margins, inconsistency on the bottom line on an annual basis, and many unprofitable quarters in a row, is it possible that these people are correct?

Salesforce provides cloud computing and social enterprise solutions to various businesses and industries worldwide. It has been a Wall Street darling since its IPO (for the most part). Despite not offering consistent profits, Salesforce has beat expectations for three consecutive quarters. Furthermore, many top investors, including George Soros, are big fans of the company.

The tug of war taking place here is between excellent revenue growth and poor valuation.

Let’s take a look at some important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for Salesforce is strong. The balance sheet is in positive territory, and cash flow is superb.    

Debt-To-Equity

Cash

Long-Term Debt

CRM

0.28

$605.56 Million

$578.52 Million

ORCL

0.46

$33.70 Billion

$19.76 Billion

SAP

0.37

$3.40 Billion

$6.79 Billion

 

T = Technicals on the Stock Chart Are Strong  

Salesforce has outperformed Oracle Corporation (NASDAQ:ORCL) and SAP AG (NYSE:SAP) over one-year and three-year time frames. Salesforce is the only company of the three that doesn’t offer yield. Oracle yields 0.70 percent. SAP yields 0.90 percent.

1 Month

Year-To-Date

1 Year

3 Year

CRM

0.25%

3.78%

32.56%

168.00%

ORCL

-0.14%

4.77%

25.07%

53.19%

SAP

-2.27%

-0.44%

28.79%

95.96%

 

At $174.46, Salesforce is currently trading above all its averages.  

50-Day SMA

168.91

100-Day SMA

159.80

200-Day SMA

149.95

 

E = Earnings Have Been Inconsistent          

Earnings have been inconsistent through the years, but top-line growth has been strong.  

2008

2009

2010

2011

2012

Revenue ($)in billions

748.70M

1.08

1.31

1.66

2.27

Diluted EPS ($)

0.15

0.35

0.63

0.47

-0.09

 

When we look at the last quarter on a year-over-year basis, we see an increase in revenue and a decline in earnings.

10/2011

1/2012

4/2012

7/2012

10/2012

Revenue ($)in millions

584.26

631.91

695.47

731.65

788.40

Diluted EPS ($)

-0.33

-0.03

-0.14

-0.07

-1.55

 

Now let’s take a look at the next page for the Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

Salesforce and cloud computing go hand-in-hand. That in itself is a big positive. On the other hand, many companies in this space have been giving weak guidance for 2013. This doesn’t have to do with cloud computing, but an unstable economy.

Conclusion

Salesforce has had incredible momentum through the years. It seems to be trapped in the virtuous cycle, which is good. However, with a forward P/E of 89.47, difficulty making consistent profits, and an unpredictable economy that will often lead to softer demand, there is a chance that this story will go from virtuous to vicious.

Is this a strong company with a solid future? Yes. Does the stock seem to be trading well ahead of itself? Yes.

Salesforce is a WAIT AND SEE.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.