Salesforce (NYSE:CRM)

CRM does a reenactment from the movie Deliverance on the shareholders everyday.

http://www.secform4.com/insider-trading/1294693.htm

CRM: I'm gonna make you squeal like a pig. Weeeeeeee!
Shareholder: Weee!
CRM: Weeeeeeee!
Shareholder: Weee!

SalesForce.com (CRM) continues to be a battleground of investors and analysts. Some see it as a definite Buy and others view it as tremendously expensive. For instance, analysts have a target range for the stock as low as $70 and as high as $210. At about $123 that would be a huge move in either direction.

By most conventional metrics, it's easy to see why many people would assert that CRM is overvalued. It has very little earnings per share (negative if you use GAAP), spends a ton of time each quarter explaining its non-GAAP accounting for earnings, and has plenty of competition in that market. However, the very reasons to invest in CRM lie within those concerns.

Valuation:
SalesForce.com released 2nd quarter earnings last week of ($0.03) per share for the first 6 months of the year. On a non-GAAP basis, that equates to $0.58 per share. Let's address this "non-GAAP" stuff before going any further. When SalesForce or any other company talks about "non-GAAP" earnings, they are factoring out accounting entries that they don't feel represent the actual operations of the company. In SalesForce's case, they factor out costs pertaining to:

Stock-based compensation expense
Amortization of purchased intangibles
Amortization of debt discount

The validity of factoring these out can be debated forever without coming to any agreement. I'm actually a fan of having these items factored out to come to a non-GAAP earnings amount because they don't reflect any real business activity (i.e. there is no actual cash being spent on these items). It helps in comparing their earnings to other companies that might not have these one-off items. I only wish that SalesForce wouldn't use 25% of their earnings press release to explain them.

SalesForce.com is projecting non-GAAP earnings in 2012 of $1.30-$1.32 per share. At first glance, that seems a little crazy. Why would anyone pay $123 for earnings of $1.30? Therein lies the debate about how to view the stock from a valuation perspective. Obviously, a forward P/E at almost 100 is tough to swallow. Here's where you have to do some calculating...and quite honestly, have some faith in management to execute on their strategy.

In valuing CRM, I normalize their sales and marketing costs, meaning that I look at what their earnings would be if they spent this money at a more reasonable level. I do this because at some point they'll stop growing like crazy and will then turn to retaining a ton of earnings. Again, this requires a bit of faith in management. Most software companies have very high margins if they are successful. SalesForce could have that right now, but they have instead chosen to take those profits and plow them back into new sales.

So let's do some math on 2012. The company projects sales at $2.22 billion. To keep the calculations simple, lets assume that instead of spending 50% of this revenue on sales and marketing, they only spend 25% and keep the other 25% for profit. That would produce an extra $555 million in profit. At 145 million shares, that produces an extra $3.83 per share. Add that to the $1.30 that management has forecasted, and you have $5.13 per share. Now at $123 you have a forward P/E of 24. This is much more reasonable given the company's growth rate.

I realize that this calculation required you suspend reality for a moment and picture a world where they didn't spend so much in the name of growth, but that financial model is not only possible, but very likely once they've achieved a desired market share.

Growth:
What other technology company spends half of their revenue on sales and marketing? A start-up company perhaps. But surely a $15 billion dollar company like SalesForce would have that under control...right? The answer is surprisingly "Yes". They're actually spending half of their revenue in sales and marketing on purpose. CEO, Marc Benioff, has made the company's strategy very clear: Growth! He understands that the industry is still relatively young and you have to fight for continued growth and market share. Otherwise, the "market" will select somebody else.

This is a very important concept to a long-term investing thesis in CRM. I'll keep it in very general terms for this analysis. In a "typical" technology market cycle, numerous companies start out offering products. Buyers and "experts" perform lots of analysis on the technical aspects of each offering. Many of the early adopters rely on this very technical view of the products.

However, in time, a handful of companies emerge as the market leaders. This becomes a self-fulfilling cycle as long as the company can keep up. Whether it's individual consumers or large customers, the psychology is very similar. During a period of mass adoption, the purchasers just want to know that the product will work as intended. They don't care as much (if at all) about all the technical aspects of the various products. Most don't have time to evaluate a dozen different options. In the end, you'll find one company that has made the vast majority of the industry profits. Another two or three will make the remaining profits. And all the other players will net break-even (i.e. some will make a little and others will lose a lot).

Think about any major technology offering and you will see this general cycle at work. Operating software? Uh...Microsoft; Internet Search = Google, Yahoo, Bing; Mobile music? Sony Walkman or Apple iPod, depending upon the decade; Bookkeeping software? Quickbooks, Peachtree; Personal Computer? That's been through a couple cycles, but how about Dell, Apple, HP, IBM (to name a few); The list could go on. SalesForce appears to understand this well. They know that they need to get to a leadership position in this market. If they do that, they will have plenty of profits in the future.

Since March 2005, Marc Benioff, founder and CEO of Salesforce.com, has been selling stock at a blistering pace. 10000 shares a day!!! These transactions have netted him 455 MILLION dollars!! http://www.secform4.com/insider-trading/1294693.htm

Also his second in command, Steve Cakebreak has netted ~18 million. The basis for his option exercises was $1.1.

http://www.secform4.com/insider-trading/1254015.htm

With such huge payoffs you would think Benioff & co. have delivered ginormous profits....Unfortunately this is not the case:

Net Income (since going public)

2004 - 4 million

2005 - 7 million

2006 - 28 million

2007 - NOTHING

2008 - 18 million

TOTAL: 57 MILLION

So Salesforce.com has only generated 57 million in actual income in the past four years, yet surprisingly Benioff's made out with 455 million, and is making 600K each day by selling 10000 shares at the current stock price of ~$60!! Something's rotten in Denmark I tell ya....

Looking at it another way, for every $1 in Salesforce.com income, Benioff has pocketed $8 in inflated stock sales!! Sweet deal! Don't you wish you could give people dollar bills and get eight back in return??

At the end of the day, if Benioff has cashed out a substantial portion of his stock, and the company--because of competition, a slowing economy, a changing marketplace, or some other unknown--fails to meet the expectations of future profitability that's baked into the stock, then we the investing public will have been duped yet again....

Overpriced.
Insiders are selling.
Microsoft has announced they will build a competing product.

Their product is simple to use and flexible. They seem to be succeeding at selling to major corporations. Once they get a foot in the door their products tend to spread and stick around for a long time. Expenses will stabilize as the product matures and the profits will keep rolling in.

overpriced dog.

Extreme Overvaluation

I'm going to go against the grain here on what alot of people think about salesforce. Some of you say that its over-hyped, and wont perform. I disagree. Most of the opinions are based from recent quarterly results. Although thats a great way to determine future growth and potential in structured companies that have been around for awhile, using traditional methods of evaluation is not the best way to value a NEW company in the fastest growing trends in the world. Salesforce is the world leader in online "cloud" computer software sharing, and as this industry grows, salesforce will do the same. Not only do they have agreements, and contracts with some of the nations biggest companies, they are now partnered with Google. If that doesnt change your perspective, i dont know what can

Benioff is could sell snow to the Eskimos. Completely overbought and due for a rational correction, regardless of what Kramer says.

Expected to grow 40% annually which isn't enough for a company with a PE of 200+. No thanks.

It's been a long time in the making, but I think "Thin Client" software applications are finally starting to find a niche, and they all begin with Customer Relation Management. Mobile Business needs these types of services. SalesForce will be a Force in 2008.

90% customer satisfaction and retention. wow.

Tech bubble 2.0

Not buying the hype--they'd have to grow earnings 100%/year for the next two years to come close to justifing the price. Maybe they really can do that since they're only starting at 50 cents. I'm not willing to wait around to find out though. S&P will win out eventually. My FoolShort is likely to get clobbered until then though. Wouldn't touch this up or down with my own money.

Shorting on valuation alone is iffy, but COME ON. This thing is in the clouds (pun intended!).

Shorting this and Netflix.

As of 20 Apr 2011, CRM is trading as follows:
11.4x PY Revenue
292x PY Earnings (Net)
208x PY FCF

This company just can't be worth almost $19b. Not when its operating and profit margins haven't made a significant increase since its listing back in 2004. In 2010, the company generated $90m in FCF on $1.65b in revenues (5.4% conversion rate). In 2007, these figures were $161m on $749m. I've worked for companies that were bigger, both in absolute and relative terms FCF-to-Revenue wise, yet are worth less than $2b.

Furthermore, insider trading numbers show that executives and investors have not made a purchase of CRM stock in the past year. And sales reps (as well as other employees) are paid in equity, which has a dual effect on financial statements and valuation: firstly, bonus "expense" is underrepresented in the income statement; and secondly current investors' holdings are continually diluted.

I don't care what people in the market say about CRM being cutting-edge, etc. If this were any other company not involved in "the cloud" it wouldn't be trading for half as much. I don't care if you think Benioff is a snake oil salesman or Jesus Christ the Savior himself, just look at the financial statements over the past few years. Heck, the company has been publicly traded for not THAT long...look at all of the financial statements.

Bottom line: CRM has no business being worth nearly $19b if its business model and management can't improve operating margins and FCF despite more than doubling revenue in a four year span -- or even hinting at future prospects of doing such. When will the bubble burst? I don't know. But it will, and I'll be there to ride the wave down.

Way overvalued. A number of cheaper and more effective cloud players entering the market.

PE (TTM) of 212........hmmmmmmmm.......bah-bye