A Force to be Reckoned With

By Chad Henage - June 29, 2012 | Tickers: ORCL, CRM, SAP | 0 Comments

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When it comes to cloud computing, the name that has become synonymous with this evolution is Salesforce.com (NYSE: CRM). Many companies are embracing cloud computing as a way to save money, stay connected to customers, and drive sales. With over 100,000 customers and name recognition, Salesforce.com seems to have an edge over their competition. If you look at the company's most recent earnings report, you can see that this company is firing on all cylinders.

Industry Leading Growth

If you compare Salesforce.com to two of their main competitors, on nearly every metric, the company leads the way. Look at measures like revenue, cash flow, and EPS growth:

(most recent quarterly results for each company) 

You can see that Salesforce is growing faster than either Oracle or SAP. Now of course Salesforce.com is a much smaller company, which accounts for some of the difference. However, even though Oracle and SAP's revenues dwarf Salesforce.com, this smaller size hasn't hurt the company's ability to go after the largest of clientele. With names like Wells Fargo, Comcast, Activision, and NBCUniversal you can see that Salesforce.com is trusted by some of the most well respected names in their respective industries. Of course, one could argue that Salesforce.com is only growing this fast, because of its relatively small size. The company's total revenues last year were $2.266 billion. That is small potatoes compared to Oracle's over $35 billion, and SAP's over $18 billion in sales. That being said, Salesforce.com has the advantage of focusing on cloud computing and social connectivity as their two main businesses. Oracle has its hands in hardware, databases, Java and a host of other endeavors. SAP of course offers solutions to handle warehouse management, financials, human resources, and others. Sometimes the company that is the most focused on one profitable and growing portion of the marketplace, is better equipped to handle change and respond to customer needs. When I've written about the company before, one of the main complaints I got about their valuation, was their use of stock based compensation. Let's clarify that issue right now.

The P/E Isn't Everything

In my prior post, I wrote that Salesforce.com was selling for a forward P/E ratio of about 70. An increase in the stock price, and a cut in earnings expectations, has driven the P/E ratio to over 90 at this point. While I'm aware that a P/E of 90 is not cheap by any measure, the P/E ratio doesn't do the company justice. Even if you include stock based expenses, the company grew their free cash flow to over $168.5 million in the most recent quarter. This represented an increase of 50% from the prior year. In addition, Salesforce.com is more efficient with their assets than companies like Oracle and SAP. Of the three companies, Salesforce.com generated the most free cash flow per $1 of assets in the most recent quarter. The company produced about $0.04 of free cash flow, Oracle produced $0.038, and SAP was actually negative. As you can see, just looking at the P/E ratio on non-GAAP earnings doesn't tell the whole story.

2013 Guidance And Analysts That Can't Keep Up

I appreciate that analysts have a hard job. I've been chided before about suggesting that analysts might be low on estimates. However, where the 20 or so analysts that follow Salesforce.com are concerned, I'm not sure what is going on. The company issued guidance for the full year, that revenues would come in between $2.97 billion and $3.0 billion. This is a pretty tight range considering we are talking billions of dollars here. Analysts seem to be on board with these numbers, and even expect a little more at $3.02 billion for current estimates. When it comes to expected EPS, I've got nothing. I mean I literally don't understand the thought process. Prior to earnings, the average analyst expected full year EPS of $1.61. The company issued guidance of $1.60 to $1.63 for full year EPS. After the company issued guidance, the average analyst now expects $1.49 for full year earnings. Keep in mind this is a company that has beaten estimates in the last three quarters by between 7.5% and 9.7%. The company is telling analysts what to expect and earnings are revised down? This would seem to argue that Salesforce.com is a lock to beat full year estimates.

Conclusion

While Salesforce.com certainly won't be classified as a value stock, the company is putting up some impressive growth numbers. Cloud computing and social networking will be the driving forces behind successful companies in the future. Cloud services offering cost savings and stronger sales, which is a win for any company that embraces this trend. Social networking allows the company to get to know their customers better than ever before. This is a win for customers, because companies can offer more tailored products and services to address customer needs. When a company can help businesses become more profitable, while at the same time improve the customer experience, this is a company to keep your eye on. Add CRM to your Watchlist and keep up with developments.

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