Muppet Emptor: More Pabulum for Salesforce Muppets
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Muppets, those lovable, furry li'l creatures who unwittingly buy all the crud recommended by Wall Street sharpies, might, if they were to think of it, wonder about the wisdom of buying all the crud recommended by said sharpies. How is it that the muppets do not wonder if it is wise to buy various analyst recommended-stocks like Facebook (NASDAQ: FB), which closed at $34.03 the day of it's much-hyped issue, and is now at $19.00 and change, lo, these scant three months later? There are a lot of newly-burned, novice investors in Facebook, whose first taste of the stock market has been like sticking their finger into an electric socket.
Or Netflix (NASDAQ: NFLX), which had a spectacular flameout, going from over $300.00 per share to just $64.00 today? Netflix was a rocket, climbing from an IPO price of $15.00 a share before it fell, a 20-bagger, for those who got out at the top. Or consider super plunger Green Mountain Coffee Roasters (NASDAQ: GMCR), which went from a high of over $115.00 in September of 2011 to $25.00 and change today after hedge fund titan David Einhorn dropped a slide presentation on it?
All three of these stocks were analyst darlings, touted as "high-flyers," as though that were a good thing, all the way up to the precipice of the cliff. Why is it that investors are not more frightened of the precarious nature of the earnings, or even non-earnings, of so many high-flying, analyst-approved stocks? One reason is that the inherent biases of the analyst trade make it institutionally difficult for analysts to be anything other than positive or extra-positive. (Buy? or strong buy? Isn't that really a contradiction in terms? Can you imagine an analyst putting out a "weak sell" on something?) But the institutional pressures that analysts work under don't, for whatever reason, receive much coverage. Accordingly, investors who place stock in analysts ratings tend to take comfort in the herd-like quality of those ratings -- "look; all the analysts have it rated as a buy; therefore it must be a buy." Another reason that investors, muppets, are not more fearful, like the great Buffet, is that they are often not told of the nature of the earnings or the non-earnings of such analyst recommended stocks.
In this, the sometimes lamentable lack of clear coverage of companies and their earnings or non-earnings, the financial press is often to blame. A case in point is a small article in The Street, an article which hit the newswires shortly after Salesforce's (NYSE: CRM) after-market earnings release. Notice the Happy Title: Salesforce Earnings Head for the Clouds. But in the article, you will find no mention, n-o-n-e, of Salesforce's earnings. Instead you will find a couple of analyst "price targets" that are going up, i.e., "in the clouds." Oh. You will also find some talk of Salesforce's non-earnings earnings, AKA their "non-GAAP" numbers. And you will even find the non-GAAP "earnings" presented simply as "earnings," in this sentence: "He [an analyst] also increased his second-quarter earnings estimates, and now expects earnings of 40 cents per share on $731.6 million in revenue."
As I explained in my prior article, Non-GAAP numbers are numbers that companies without real earnings like to talk about, understandably. Non-GAAP numbers are generated by taking reality-based, Generally Accepted Accounting Principles numbers and then taking out various items you want to take out. In the case of Salesforce, the numbers are these: when they report second quarter earnings after the bell today, they are expected to report non-GAAP "earnings" of 39 cents per share. But the number which does not appear in the above linked article is their GAAP number. That number is expected to be a loss of 9 or 10 cents per share. The main expenditure accounting for the difference between Salesforce's non-GAAP numbers and their GAAP numbers is their rapidly rising option expense. This expense is expected to rise over 60% from 2012 to 2013, from $229 million to $368 million.
Because this stock-based compensation, or option expense, is backed out of the GAAP numbers to get the non-GAAP numbers, and because this option expense accounts for 74% of the discrepancy between the GAAP numbers and the non-GAAP numbers, a cautious or fearful investor might want to know about it. Muppet emptor. If you do not have Buffet to guide you, then consider the great Fidelity manager Peter Lynch's advice: "Invest in what you know." Let me humbly offer a corollary: Invest in what you know about.
boriskabinov is short Salesforce via long-dated puts. The Motley Fool owns shares of Facebook and Netflix and has the following options: short AUG 2012 $130.00 puts on Salesforce.com, long AUG 2012 $150.00 puts on Salesforce.com, short JAN 2013 $150.00 calls on Salesforce.com, long JAN 2013 $150.00 puts on Salesforce.com, long DEC 2012 $16.00 puts on Green Mountain Coffee Roasters, and short DEC 2012 $21.00 calls on Green Mountain Coffee Roasters. Motley Fool newsletter services recommend Facebook, Green Mountain Coffee Roasters, Netflix, and Salesforce.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
