The salesforce.com Conundrum

By Douglas Ehrman - August 30, 2012 | Tickers: ORCL, CRM, SAP | 0 Comments

• Email
• Print

Despite recent negative earnings news, analysts continue to love salesforce.com inc. (NYSE: CRM), with 27 of 31 rating the company a buy. A recent IT spending survey conducted by Piper Jaffray shows the company remains a key player in cloud computing solutions at the enterprise level and the stock is up nearly 25% in the last month. Critics continue to point out that the company is losing money on a GAAP basis and reports margins that are under pressure. Still, the stock continues to be a darling of investors while presenting a conundrum to those who look carefully.

The Numbers, Plus…

While revenues grew by 34% in the most recent quarter, rising from $546 million a year ago to $731.6 million, the GAAP net loss in the quarter was $9.8 million compared to $4.3 million a year ago. The loss translates to $0.07 per share on a GAAP basis; excluding certain items, the company earned $0.42 on a non-GAAP basis, beating the $0.39 estimate. Additionally, the company issued guidance for EPS between $0.31 and $0.32, compared to the $0.34 that was expected. If one cuts through all of these numbers, the simplified message is this: revenues are growing, but costs are growing faster. As companies like Oracle (NASDAQ: ORCL) and SAP AG (NYSE: SAP) push further into this space, each of which have other business lines to support their efforts, salesforce.com cannot wait indefinitely to get its house in order.

… The Cloud, Plus…

The recent IT spending survey conducted by Piper Jaffray showed that salesforce.com ranked as the top player in cloud services, being specifically mentioned by 28% of the CIOs polled. Additionally, Forrester Research, an independent research firm, recognized the company as the leader in customer service in the space. The very concept of cloud computing, which once caused great concerns for the company amongst speculation that customers would be hesitant to put confidential information online, has become one of the cornerstones of modern technology. Salesforce.com has established itself as the dominant player in its field, even as the competition heats up.

… The Chart, Plus…

One does not need to be a technical analyst to see that the two-year chart of this stock has something to lend to the conversation. Leaving moving averages, relative strength lines and stochastic oscillators aside, the price of this stock has approached the $160 level several times and never been able to climb higher. Likewise, it has reached the $150 level several times as well and then fallen sharply. While chart patterns are not the central theme of this discussion, recognizing that there will be an important psychological impact if the stock successfully breaks each of these levels is an important part of trading the stock. One does not need to subscribe to the technical analyst school of thought to acknowledge that it may have a market impact.

CRM data by YCharts

… Unique Positioning

Perhaps as integral to the mixed feeling investors have toward this company as any of the above factors is the fact that it is difficult to easily compare salesforce.com to other companies. Client relationship management has become accepted as a critical part of the efficient functioning of any business. With options that target small business to those designed for large corporate players, salesforce.com has the most established solutions available. For example, governments in more than 80% of states trust the company with their social enterprise activities, as do approximately 66% of cabinet-level federal agencies.

Given the importance of the space, Oracle and SAP have each made significant pushes to add similar functionality to the business solutions offered by each. The human resources modules that are being added by each have the advantage of being a part of broader systems. Oracle alone reports that it has already booked more than $1 billion of business in the cloud computing space. Earlier this year, SAP bought SuccessFactors, an HR software company, to bolster its efforts in the cloud-based, HR functionality.

… Equals a Lack of Clarity

The real challenge when considering salesforce.com as a prospective investment is to determine if the company is attractive as an idea or as a performance generator for one’s capital. Ultimately, while the company has a great long-term outlook if it is able to control costs and become profitable, at current levels, it has greater downside risk than upside potential. Should the company be able to break out to the upside and become solidly profitable, it represents a solid option, but until then, investors should remain cautious and treat the stock as highly speculative.

• Email
• Print
• Feedback