With shares of Salesforce.com (NYSE:CRM) trading at around $40.95, 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
Understanding the Salesforce story is relatively simple. Salesforce has managed to consistently increase revenue on an annual basis, but it has difficulty delivering profits. Below are Q1 revenue numbers.
- Subscription & Support up 28.5 percent year-over-year
- Professional Services & Other up 25.3 percent year-over-year
- Americas up 30.0 percent
- Europe up 38.0 percent
- Asia up 7.0 percent
Up to this point, one might wonder why shorts are all over this stock. After all, as long as there is revenue growth, there is potential. However, in Q1, gross margin dropped 160 bps to 76.6 percent, and operating expenses increased 28.6 percent. The biggest expenses have been R&D, G&A, and sales and marketing.
Another issue investors have with Salesforce is creative accounting. Investors have a reason to oppose executives being paid via stock-based compensation, but it’s also ironic that there are creative accounting concerns when the company can’t deliver consistent profits. This is a rarity.
|Operating Cash Flow||806.87M||13.72B||19.32B|
It’s obvious that Saleforce can’t hold a candle to Oracle and IBM on a fundamental level. Let’s take a look at some more important numbers prior to forming an opinion on this stock.
T = Technicals Are Mixed
Salesforce has outperformed Oracle and IBM over a three-year time frame, which is impressive. However, Salesforce has been the weakest performer year-to-date.
|1 Month||Year-To-Date||1 Year||3 Year|
At $40.95, Salesforce is trading below its averages.
E = Equity to Debt Ratio Is Normal
The debt-to-equity ratio for Salesforce is higher than the industry average of 0.30, but it still qualifies as normal.
E = Earnings Have Been Poor
Earnings are the biggest problem for Salesforce. The annual trend is not good. Revenue can assist a stock’s performance for a considerable amount of time, especially in a bull market, but once the party ends, investors and traders will opt for consistently profitable companies.
|Revenue ($) in millions||1,077||1,306||1,657||2,267||3,050|
|Diluted EPS ($)||0.09||0.16||0.12||-0.02||-0.48|
Looking at the last quarter on a year-over-year basis, revenue increased but the loss widened. A similar pattern played itself out on a sequential basis.
|Quarter||Apr. 30, 2012||Jul. 31, 2012||Oct. 31, 2012||Jan. 31, 2013||Apr. 30, 2013|
|Revenue ($) in millions||695.47||731.65||788.40||834.68||892.63|
|Diluted EPS ($)||-0.04||-0.02||-0.39||-0.04||-0.12|
Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?
Salesforce is trading at 65 times forward earnings, which doesn’t leave much margin for error. The stock is down in what has been a strong market year-to-date, guidance was underwhelming, competition is likely to increase, there are currency headwinds, and margins and net income have seen consistent declines since 2010.
Despite all the negatives, many of the company’s problems are fixable. However, that’s easier said than done. Furthermore, stock momentum has swung to the downside. An additional concern is that the stock wouldn’t hold up well if the market were to suffer a correction. There are much safer options available.
Salesforce still has a lot of potential, but the current situation makes Salesforce a WAIT AND SEE.
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All content posted should not be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions. I don’t have any positions in this stock.