Should you buy into CRM’s growth story?

Keki is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Salesforce.com (NYSE: CRM), the provider of cloud computing and social media solutions for enterprises came out with second quarter revenues which were more or less in line with analyst expectations. However, with higher revenues came yet another quarter of red on the bottom line. The company has religiously made operating losses since the previous financial year, as it continues to spend way more on acquisitions and marketing activities than it earns.

So should you take a bet on CRM for the long run? Well, before we discuss that. Let’s take a look at the company’s latest quarterly numbers.

Figuring it out

Salesforce.com saw second quarter sales rise 34% from the prior year period to $731.6 million mainly aided by a 35% growth in subscription and support revenues. But while the company’s top-line dream run continues to impress investors and analysts alike, the overall surge in costs have deprived its ability to turn a profit.

Operating and revenue costs alone ate up a hefty $745 million during the quarter, consequently leaving behind an operating loss of $13.4 million and a net loss of $9.8 million which was albeit narrower than what some analysts estimated.

But while the inordinate amount of expenditure is upsetting many, something else caught my attention. A quick look at CRM’s cash flow statement revealed a 65% jump in cash from operating activities from the previous year’s quarter. Now at first, this might give you an encouraging view of the company since operating activities part of the cash flow statement should show movements primarily on account of core business activities. However this isn’t the case for Salesforce.com.

Out of nearly $136 million of cash generated from operating activities for the second quarter, a sum of $85.4 million (roughly 62%) is attributable to one line item called “Expenses related to stock-based plans”. So in real terms, CRM generated hardly $65.48 million in operating cash flows (excluding the stock based compensation and tax effect) out of $731 million of revenue.

But I’m afraid that CRM’s problems aren’t restricted to the crafty way it shows its financials.

No longer unique

A company generating billions in revenue with no profits at all is disturbing enough. But what’s positively frightening is the sheer amount of competition CRM would have to contend with. Salesforce.com started off as just a sales management software company back in 1999, since then it has made huge investments in expanding its portfolio of products that offer a range of software relating to HR, and marketing. Recently in June Salesforce moved into social media marketing in a big way through its acquisition of Buddy Media for $689 million.

But while all this may benefit the company, it does not in any way give it a significant edge over more experienced and resourceful rivals. Companies such as Oracle (NYSE: ORCL) and SAP (SAP) already offer similar HR software over the web.

While SAP recently entered acquired HR software maker SuccessFactors, Oracle claims to have already booked about $1 billion from its cloud based human resource and customer relationship software offerings. Tech giant IBM (NYSE: IBM) also seems to have jumped into the fray with a $1.3 billion acquisition of cloud based human resource software maker Kenexa. So it’s not very farfetched to assume that Salesforce’s stellar growth days are numbered. This trend can only be a threat to CRM’s growth, as an ensuing price war could cut heavily into margins.

Besides this, with the European economy in a perpetually sorry state, and looming fears of declining corporate spending in the air, Salesforce’s growth trajectory suddenly looks a lot harder to maintain, given the fact that the company is already in the red.

The Foolish Bottom line

With sky high costs and growing competition it’s very likely that Salesforce.com will lose its niche as a premier HR and CRM software provider. At about $150 levels I feel that the stock price is highly overvalued for a company that’s not made any profits for quite some time. In addition, a number of powerful rivals now threaten CRM’s otherwise compelling growth story.

So what do you think of CRM and its future? Feel free to express yourself in the comments section below.


kekidf has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines 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 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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