The Salesforce Love Triangle

With shares of Salesforce.com (NYSE:CRM) trading at around $40.71, 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

Customers love Salesforce, investors love customers, and Salesforce loves investors. While all this is accurate, it’s not entirely fair. Truth be told, Salesforce also loves its customers. In fact, it’s the closest a company can come to wining and dining its customers without actually doing so. The best part is that the feeling is mutual.

Customers who have been lucky or wise enough to use Salesforce have often stated that they would be lost without having done so. For example, the Sales Cloud offers many features, all of which are based on prioritization and speed. The average Sales Cloud customer has reported a 32 percent increase in productivity, a 32 percent increase in lead conversion, and a 29 percent increase in win rates.

Salesforce is the largest provider of CRM, and it created the SAAS CRM market. Most customers prefer paying monthly opposed to buying software because they can use the latest updates. One big plus for investors is that Salesforce will always push for package upgrades so the customer will receive more features. Many customers end up happy with their upgrade.

On Glassdoor.com, Salesforce has an employee rating of 3.8 out of 5, which is one of the highest ratings seen. An impressive 76 percent of employees would recommend the company to a friend. An even more impressive 93 percent of employees approve of CEO Marc Benioff. That’s what you call strong company culture!

A few negatives for Salesforce include weakening stock price momentum, weak margins, no dividend yield, a decline in earnings on an annual basis, and poor valuation.

The chart below compares fundamentals for Salesforce, SAP AG (NYSE:SAP), and Oracle Corporation (NASDAQ:ORCL). Salesforce has a market cap of $23.84 billion, SAP has a market cap of $93.03 billion, and Oracle has a market cap of $152.43 billion.

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CRM

SAP

ORCL

Trailing   P/E

N/A

24.78

15.06

Forward   P/E

64.62

19.79

11.08

Profit   Margin

-8.87%

17.60%

28.46%

ROE

-13.85%

20.71%

24.29%

Operating   Cash Flow

$736.90 Million

 $5.07 Billion

  $13.72 Billion

Dividend   Yield

N/A

0.90

0.70%

Short   Position

2.90%

N/A

1.10%

 

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

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Salesforce is close to the industry average of 0.30. Debt management has been good.

Debt-To-Equity

Cash

Long-Term Debt

CRM

0.28

$867.62 Million

$647.94 Million

SAP

0.30

$6.15 Billion

$5.83 Billion

ORCL

0.45

$33.41 Billion

$19.75 Billion

 

T = Technicals Have Weakened

Salesforce has performed well over the past three years, but that momentum has come to a halt. It has been a difficult year so far for the industry.

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1 Month

Year-To-Date

1 Year

3 Year

CRM

-7.41%

-3.13%

3.94%

89.77%

SAP

-1.52%

-2.99%

19.00%

66.66%

ORCL

1.28%

-2.88%

11.74%

27.71%

 

At $40.71, Salesforce is trading below its 50-day and 100-day SMA, but still above its 200-day SMA.

50-Day   SMA

43.06

100-Day   SMA

42.64

200-Day   SMA

39.48

 

E = Earnings Have Been Weak             

This is a major negative. In an era when the majority of companies throughout the broader market have shown a consistent increase in earnings from 2010 to 2012, Salesforce has headed in the opposite direction. On the other hand, while many companies throughout the broader market have suffered a revenue decline in 2012, Salesforce has continued to move forward without skipping a beat.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

1.08

1.31

1.66

2.27

3.05

Diluted   EPS ($)

0.09

0.16

0.12

-0.02

-0.48

 

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

1/2012

4/2012

7/2012

10/2012

1/2013

Revenue   ($)in   millions

631.91

695.47

731.65

788.40

834.68

Diluted   EPS ($)

-0.01

-0.04

-0.02

-0.39

-0.04

 

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?

T = Trends Might Support the Industry

The industry has seen a slowdown of late, which isn’t a good sign as it indicates a slowdown in spending. However, the three companies mentioned in this article are well positioned to benefit from future technological trends.

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Conclusion

Salesforce is a strong company with a great company culture, impressive growth, and good debt management. On the other hand, margins and cash flow are subpar.

The stock won’t hold up as well as Oracle in bear markets, but it should outperform Oracle in bull markets. It really is that simple. Therefore, a lot will depend on an investor’s risk tolerance. High-risk investors might want to consider investing in Salesforce at an incremental pace (reduce downside risk), and conservative investors might want to consider Oracle due to its somewhat resilient nature and small yield.

Salesforce is a neutral WAIT AND SEE, but once again, a lot depends on investing philosophy.

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.

Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I am currently short technology, financials, the Russell 2000, and the euro.

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