Salesforce Living Up to its Name?

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Cloud computing is one of the hottest buzzwords in the tech sector at the moment. This relatively new technology allows users to access computing resources through a network, and according to proponents, allows for greater scale advantages and improved efficiency. Salesforce (NYSE: CRM) is widely considered the leader in the cloud computing space, and is growing its top line very impressively.

The firm offers sales and marketing solutions to big hitters such as Coca Cola and McDonald’s, and has recently pulled in a few more high-profile contracts. The most recent earnings report showed strong sales and revenue growth, but some analysts are wondering how well management is doing on the bottom line.

Q4 Earnings

In the most recent release, Salesforce delivered top- as well as bottom-line performance that exceeded analyst expectations. In fact, the firm has one of the fastest top-line growth rates in the tech sector, and was recently named the world’s No. 1 most admired software company by Fortune magazine. Sales for the quarter were up a huge 32% year over year to $835 million.

For the full year, the company delivered revenues in excess of $3 billion, representing a rise of 35% from fiscal 2012. Another highlight from the report was the strong operating cash flow, which rose 17% to over $280 million. Based on these strong results, the company upped its guidance for fiscal 2014, now expecting revenues of between 3.82 and 3.87 billion dollars.

While the top-line growth is very impressive, there are some problems on the company’s bottom line. Due to stock-based compensation expenses and a one-time tax charge, the firm delivered a net loss of $20.8 million, versus a net loss of $4.08 million a year earlier. Excluding these items, Salesforce reported EPS of 51 cents, beating the consensus of 40 cents.

Growing Competition

Despite Salesforce’s position as a pioneer of the cloud software and marketing space, the firm is facing growing competition from the likes of SAP (NYSE: SAP), a German competitor, and Oracle (NYSE: ORCL). These rivals are pumping a great deal of money into acquisitions meant to challenge Salesforce’s software solutions. At the end of last year, Oracle acquired Eloqua, a provider of cloud-based marketing automation, for about $871 million.

SAP has released a number of cloud marketing solutions of its own, and while it joined the game a little later, it seems to be making some decent progress. The firm now offers a CRM rapid deployment package for sales, marketing, and services, as well as an SaaS package targeting sales representatives. These developments are provoking Salesforce to come up with acquisitions of their own in order to keep up.

Soaring Valuations

The software firm’s spectacular top-line growth has prompted many investors to get in on the stock, which has propelled its valuation to rather lofty multiples. The stock now has a forward P/E of about 71, although with an expected three-to-five-year EPS growth rate of around 52%, one can see why the market has such high hopes of the stock.

The firm’s quarterly revenue growth of 35% dwarfs Oracle’s 3% and SAP’s 12%, although the stock is considerably more expensive looking at forward P/E,  price to sales, and its five-year expected PEG ratio. The question is whether the company’s growth will be able to keep up with these steep metrics.

The bottom line

Salesforce delivered another excellent quarter of top-line growth, with sales increasing handsomely year-on-year. On the other hand, the bottom-line performance was somewhat disappointing. Still, the company is one of the fastest growing names in the sector and appears to be able to sustain this trend.

While valuations may be getting a bit high compared to that of the competition, nobody in the cloud space seems to be generating the kind of growth that Salesforce does. In terms of sales, the company does indeed appear to be living up to its name.

DUJames has no position in any stocks mentioned. The Motley Fool recommends The Motley Fool owns shares of Oracle.. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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