Salesforce.com: Wall Street Darling or Dog?

Salesforce.com (NASDAQ:CRM) is turning heads, thanks to the stock’s meteoric rise of more than 400 percent since 2009. The stock is surrounded by controversy — the bulls tout Salesforce.com’s high revenue growth and industry-leading IT services, while bears fire back, arguing that the company will never be profitable. Let’s use our CHEAT SHEET investing framework to cut through the noise, and decide whether Salesforce.com is an OUTPERFORM, WAIT AND SEE, or STAY AWAY.

C = Catalysts for the Stock’s Growth

Gartner (NASDAQ:IT) — an advisory firm that reviews IT services — recently evaluated Salesforce.com’s Sales Cloud and Service Cloud as industry leaders. To anyone who works closely with these types of systems, Salesforce.com’s high ratings should come as no surprise. In fact, the company has achieved Gartner’s coveted “leader” rating in each of the last seven years. Its dominant position in the rapidly growing cloud computing industry has led to revenue growth of more than 30 percent this year.

However, the market had trouble digesting Salesforce.com’s recent acquisition of digital marketing company, ExactTarget, for $2.5 billion. Salesforce.com acquired ExactTarget for a more than 50 percent premium. CEO Marc Benioff implied that through the acquisition, the company is working to establish a dominant presence in the quickly developing world of digital marketing. With an impressive client roster, and strong cloud marketing systems already in place, ExactTarget seems like a valuable acquisition. However, considering that ExactTarget has not been profitable since 2008, $2.5 billion seems like a lot to pay for a company that generated just $300 million in sales last year.

E = Earnings Per Share are Decreasing Year-over-year

Salesforce.com’s GAAP income trend is scary. Not only is the company’s net income decreasing every year, but the rate at which it’s shrinking is also increasing. Salesforce.com’s revenue picture is much better — sales have increased at a healthy rate in the last three years. The company’s profit margins are struggling because of high marketing and sales costs, which amounted to more than 50 percent of total revenue and $115 million in stock-based compensation expenses last quarter.

Salesforce.com’s accounting conventions are aggressive, to say the least. When reviewing Salesforce.com’s financials, it’s important to distinguish between GAAP and non-GAAP earnings. Salesforce.com does not report stock-based compensation, which accounts for a large part of its expenses, in its GAAP earnings. The company’s expects to report another net loss in its 2014 fiscal year, of earnings per share between -$0.33 and -$0.31.

2012 2011 2010
Yearly Net Income (in thousands)

-$270,445

-$11,572

$64,474

Net Income Growth YoY

-2437%

-118%

-20%

Yearly Revenue (in thousands)

$3,050,195

$2,226,539

$1,657,139

Revenue Growth YoY

37%

34%

27%

*Data sourced from Yahoo! Finance and YCharts

T = Technicals on the Stock Chart are Mixed

Salesforce.com is currently trading around $42.31, above both its 200-day moving average of $42.13, and its 50-day moving average of $39.13. The stock was up 32.7 percent in the last 12 months — performing slightly better than the S&P 500, which was up 26.7 percent.

There are two red flags from a technical perspective, though. First, there was the occurrence of a “death cross” — where the 200-day moving average crosses over the 50-day moving average — at the beginning of the month. This generally implies investor sentiment is changing for the worse. Second, is the amount of short interest for the stock — short sellers hold a massive 87.2 percent of the shares outstanding.

Conclusion

Salesforce.com has captained the development of the cloud computing industry. The company continues to report high revenue, and has made several key acquisitions in expanding its digital marketing business.

However, it is unrealistic that Salesforce.com will continue to enjoy such a high growth rate. While late to the party, tech giants Microsoft (NASDAQ:MSFT), Oracle (NYSE:ORCL), SAS, and IBM (NYSE:IBM) have all established a presence in the cloud computing scene in the last several years, intensifying competition for Salesforce.com’s products.

Salesforce.com’s growth strategy has recently focused less on innovation, and more on acquisition: a more expensive tactic that is clearly not helping the company’s bottom line. With a forward price to equity multiple of 75.25, Salesforce.com is relatively expensive to boot. If the company can significantly improve its profit margins, while continuing to generate stable revenues, Salesforce.com might be a buy. For now, it looks a lot more like an ill-fated stock during the dot-com bubble. Salesforce.com is a STAY AWAY.

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