Which Billionaires Are Betting Against a Tech Bubble Part Deux?

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Thoughts of 1999 bring back memories of the dot-com bubble, when valuations were astronomical and stock prices of Internet and technology companies eventually came crashing back down to earth. Is Salesforce.com (NYSE: CRM) living in its own dot-com bubble? Top fund managers Jim Simons, Ken Fisher and Steven Cohen do not think so. Jim Simons bought over 600,000 shares, while Ken Fisher bought over 2.6 million shares; both of these are new positions for the managers. Steven Cohen increased his 1Q stake by over 200%.

From 1999 to 2000, companies such as Microsoft (NASDAQ: MSFT) and Yahoo! (NASDAQ: YHOO) saw large run-ups in their stock prices before they came tumbling back down. Shares of Microsoft rose 68% from 1999-2000, and Yahoo! was up 145% over the same year. Salesforce is up over 400% since 2009, versus the S&P, which is up only 70%. The P/E ratios for Microsoft and Yahoo! were also well out of line—Microsoft traded as high as 74x and Yahoo! was at 263x. Salesforce currently trades at some enormous valuation multiples—including a forward P/E of 104, versus the industry average of 15x. Also, Salesforce trades at a P/S of 8.3, compared to the industry average of 2.1x.

Yahoo! now trades at a P/E of 18 and is down 84% since 2000. Microsoft and Yahoo! have joined forces in a search and advertising pact that allows Microsoft to power Yahoo!’s search results and non-premium related advertising. Yahoo! still has a solid presence on the internet, with over 700 million users around the world—and is an Empyrean Capital Partners’ Top Pick. However, Yahoo! has seen issues arise with execution and monetization.

Microsoft also took a plunge post-2000; the company is down almost 50% since 2000 and now has a P/E of 15. The company still has large dependencies on its Windows brand, with revenue for Windows and Windows Live expected to be up 17% in 2013.  Microsoft has traded in a tight range for several years, but is looking to break out with prospects in the mobile sector, including the launch of a Windows operating system. Also, Microsoft recently purchased a mobile security firm.

Salesforce continues to post strong results, with billings up 30% year over year for 2Q. Salesforce products have shown strong demand for its customer-facing applications. The CRM applications that Salesforce provides has become popular with a number of companies focused on retaining existing customers and attracting new ones. Management also raised 2013 guidance above consensus expectations—Salesforce is now expecting a 34% rise in sales for 2013, with a 34% increase in subscription and support sales and 25% in professional services. Also, in August Salesforce acquired Buddy Media, giving the company exposure to the fast-growing marketing management market.

A couple of Salesforce’s key competitors include Oracle (NYSE: ORCL) and Adobe (NASDAQ: ADBE). Oracle is still finishing integration of Sun Microsystems post the acquisition, which should help the company with synergies in its hardware business. However, margins are expected to contract and organic revenue growth slow as pricing is pressured. This is due to the growing adoption of cloud-computing technologies from other vendors, but Oracle is looking to engage in notable cloud related acquisitions, already acquiring RightNow for $1.5 billion in January 2012 and Taleo for $1.9 billion in April 2012—see how Oracle can make billions in this industry.

Adobe is being pressured from weakness in Europe and disasters in Japan, but revenue is expected to be up 5% in 2012. Earlier this year Adobe launched a new Creative Cloud service, essentially a software-as-a-service offering that gives customers access to the entire portfolio of Adobe products. The launch of this service has disrupted the company’s sales cycle, as subscribers shift to the new monthly model. This sales model transition has caused next quarter EPS guidance to be revised downward from $2.61 to $2.41—but is Adobe a good stock to buy?

The software-as-a-service (SaaS) industry is still in its infancy, and should continue to grow as businesses shift IT costs from fixed to variable. However, we question whether Salesforce’s price is justified by its potential growth. The company has grown at a 62% CAGR over the past five years, but is expected to only grow at a 28% CAGR over the next five years; as a result we remain cautious on whether it can keep pace with growth projections.

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This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Microsoft and Oracle and has the following options: short JAN 2013 $150.00 calls on Salesforce.com and long JAN 2013 $150.00 puts on Salesforce.com. Motley Fool newsletter services recommend Adobe Systems 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.

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