3 Things to Consider Before Buying Salesforce.com
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
One of the most commonly mentioned features of Salesforce.com (NYSE: CRM) is that it is a company that investors and analysts inherently, and sometimes inexplicably, want to like. While I uncomfortably fall into this group, there are three main questions that need to be answered before making an allocation of capital to the stock. The first is to determine if there is any way to justify the high valuation at which the stock currently trades. The second is to consider how the company can compete with rivals like Oracle (NYSE: ORCL) in providing integrated solutions. The third is to satisfy ourselves as to whether Salesforce.com can adapt to the shifts currently taking place in computing. When these questions are answered, the result is a stock where, like any case of unrequited love, following our hearts may get us in trouble.
The Valuation Question
There is no way to avoid the simple reality that Salesforce.com is expensive. On a trailing basis, the company has not been profitable and on a forward-looking basis, the stock is still trading at a forward P/E of 77. The company does have year-over-year quarterly revenue growth of 34%, so we are obviously dealing with a company squarely in the growth sector, but at some point investors will expect to see some concrete profits. The company had over $1.5 billion in revenue last year, demonstrating that it has an extremely robust operation. The growth element is one of the main reasons the stock remains a favorite of Wall Street and individual investors, but this state of explosive growth and no profits cannot last indefinitely.
Competing in the Cloud
The next major concern is whether Salesforce.com will be able to compete with companies like Oracle that are more able to offer integrated solutions. Oracle has been a vocal critic of the decision by Salesforce.com to opt for a cloud architecture that does not use Java. This has the potential to disrupt the ability of Java-based software to function properly within the Salesforce cloud. Furthermore, businesses that require data storage, web hosting, and other software based solutions are likely to favor options like Oracle that can provide a single source for service. This means that the interplay between cloud solutions and customer databases will become of increasing importance.
The Shift to Mobile
The last, and possibly most important, issue that should be considered before buying this stock is the role of mobile in the company’s future. As one analyst aptly explains it: “ while enterprises are just beginning to really understand and absorb SaaS/cloud computing, an even bigger quake is shaking up IT: mobile computing.” As smartphones and tablet become an increasingly important part of the business landscape, “small screens” are becoming the primary point of interaction for most individuals with their technology.
What this transition has meant for technology companies is that formulating a cohesive approach to mobile is of critical importance for both adoption and monetization of otherwise sound options. As some indication of how important this shift has become, it is a central focus of such major players as Google (NASDAQ: GOOG) and Facebook (NASDAQ: FB). Google, which is the unquestionable king of search, is faced with the very real issue that as more searches are performed on small screens, ad space is limited and results need to be more targeted. The problem with monetization has plagued Facebook since its IPO – the company has over one billion users and its weak mobile strategy has made it a huge challenge to derive profits from that base. Both Google and Facebook are dedicated to solve the mobile question as a direct focus for new technology, not by trying to jam what they have into a new box. Salesforce.com will need to take similar steps.
Being counted in the company of Google and Facebook is usually a good thing, but in this case, developing a workable strategy for mobile is a critical need of all three. Salesforce.com has the resources to take this step; the question is whether it has the will and the vision. Keeping track of this development should be a major concern of current and potential shareholders.
While I share the same romantic view of Salesforce.com as do many others, the company is facing some serious concerns moving forward. Before dedicating capital to the stock, you need to be sure you are comfortable with the risks involved. If the company can address these concerns, it has a real chance to meet everyone’s very lofty expectations.
Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook, Google, and Oracle and has the following options: short JAN 2013 $150.00 calls on Salesforce.com, long JAN 2013 $150.00 puts on Salesforce.com, and long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook, Google, 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.