Salesforce.com - Cloudy Valuation Or Fair Price Market Leader?

By Chad Henage - January 22, 2012 | Tickers: CRM | 0 Comments

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Salesforce.com (NYSE: CRM) is a company that could be called the leader in cloud computing. The company boasts customers such as: Dell, NBC Universal, Google, Linkedin, HP, Starbucks, SunTrust, Cisco, United Way and thousands more. Their customers use Salesforce.com's differnt cloud platforms to streamline their operations, increase sales and marketing, keep everyone connected, and save time and money. At last count over 100,000 companies were using a solution from Salesforce.com. Let's take a look at what all of this success means in terms of stock price and expected growth. 

Current Price: $114.19
P/E based on '12 full year earnings: 70.06
Growth expected: 24.77%
Off 52 wk high: -28.68%

Now at first glance the forward P/E that Salesforce.com commands might seem high relative to it's expected growth rate. The thing to keep in mind is that P/E ratios are based on earnings expected and expected growth. The thing to keep in mind is the future P/E might be misrepresented if the growth assumptions are wrong (more on that in a minute). In additon P/E ratios do not exist in a vacuum. To get an idea if the stock is undervalued, fairly valued, or overvalued we need to look at their competition. So who does Salesforce.com compete against and what are their stocks valued at? Let's compare Salesforce.com to a few other companies hoping to take market share from Saleforce.com's cloud. Yahoo Finance lists Oracle and SAP as direct competitors, and to that list I would add Netsuite. I would also throw in Amazon as its cloud servers are a growing part of the e-tailers business. We will also look at Microsoft as they are already making strides to bring cloud solutions to the mainstream. Side by side let's see what the numbers tell us:

This is a broad comparison as some of these companies participate in the cloud only in the smallest sense. However, each company has either current offerings or future ambitions of being a major player in the ultimate move to cloud based computing. What can we take away from this in relation to Salesforce.com? First, they do not have the highest forward P/E, Netsuite and Amazon sell for higher multiples. Second, while their expected growth is 3rd highest I would argue that this growth estimate is likely low. Salesforce.com has been growing at over 55% for the last several years. While growth will certainly slow as the company gets larger I don't know that a 50%+ haircut in growth makes sense. If anything I would suggest if Netsuite can grow at 33.1% then that seems a more reasonable target for Salesforce.com as well. Third, on a PEG basis Salesforce.com has the 3rd highest number. With the company growing at 55% in the last several years, and beating analyst estimates by about 8% a quarter the PEG is likely to drop faster then this table would represent because of this explosive growth.

You can certainly make the argument that Oracle, SAP, and Microsoft are cheaper based on their growth rates. The difference is all 3 companies are much larger, more established, and tied to much slower growth products and services. If you want a piece of the cloud in your portfolio a leader like Salesforce.com is not a bad place to start your search.

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