You Should Stay Away From This Company

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

A true value investor must always keep his two eyes open - one for detecting value bargains trading at an attractive price, and his other eye - always watching for the next World.Com or other similar financial disasters awaiting to happen.

This time I will discuss an opportunity of the latter form. Our current candidate is the social media giant, Salesforce.Com (NYSE: CRM). The company provides cloud computing and social enterprise solutions to various businesses and industries worldwide and delivers customer relationship management applications through Internet or cloud.

The company's share price has rocketed in this past year to the $160 level. Take a look at the graph below.

<img border="0" height="249" src="http://chart.finance.yahoo.com/c/1y/c/crm?lang=en-US&region=US" width="581" />

Some imminent warning signs

  1. Revenue growth does not match earnings: The company recently reported third quarter revenues of $788 million, up 35% on the year. Revenues exceeded analysts' expectations of $776.5 million. Despite this growth in revenues, the company reported a net loss of $249.6 million, or $1.78 per diluted share. When a company manages to grow its revenue rapidly yet its earnings do not grow in tandem, there is sufficient reason to become skeptical because it either indicates that the company has absolutely no control over its costs, or that revenue is recognized not according to the standard accounting rules. I am not sure which option I prefer had I been a shareholder of the company.
  2. Aggressive accquirer: Salesforce is a serial acquirer. It implements an aggressive accounting policy and it pays for those transactions with a dangerous currency, its stock. Shareholders of a company must always pay attention when a company pays with its stock. It usually means that the company believes that its stock is overvalued. Not only that, but the company apparently isn't doing a great job with those purchases either. Take, Buddy Media, a social enterprise software. Salesforce bought Buddy Media six months ago. Recently, in an 8-k filing, it reported a cumulative net loss of $20.5 million.
  3. Management: The company's CEO and founder, Marc Benioff, often engages in a promotion of his company's stock. In my opinion, being enthusiastic about your company is legitimate, but throwing projections in the air at press conferences is not.
  4. Bloated valuations: The stock is far from being decently valued. Let's compare the stock to a few of its rivals in the cloud computing industry such as SAP (NYSE: SAP), Oracle Corporation (NYSE: ORCL) and Google (NASDAQ: GOOG).
<table> <tbody> <tr> <td> </td> <td>forward P/E</td> <td>Price/Sales</td> <td>PEG</td> <td>Chane in quarterly earnings (YOY)</td> </tr> <tr> <td><strong>CRM</strong></td> <td> 79</td> <td> 7.8</td> <td> 3.7</td> <td> N/A</td> </tr> <tr> <td><strong>ORCL</strong></td> <td>11</td> <td>4</td> <td>0.97</td> <td>10.5%</td> </tr> <tr> <td><strong>GOOG</strong></td> <td>14.7</td> <td>4.6</td> <td>1.25</td> <td>-20%</td> </tr> <tr> <td><strong>SAP</strong></td> <td>21.5</td> <td>4.5</td> <td>1.6</td> <td>-50%</td> </tr> </tbody> </table>

It is easy to see that Salesforce.Com is way too expensive in relation to its rivals both in terms of P/E and its Price/Sales. Not only that, but its high PEG implies that even though the company displays growth, you are paying top dollar for it. 

The Fool looks ahead

In my opinion, Salesforce is a classic dot.com bubble company. The mighty growth in revenues is not sustainable and the company has flashing red flags all over it. I recommend to steer clear of this company. 

 


shmulikarpf has no positions in the stocks mentioned above. The Motley Fool owns shares of Google and Oracle. Motley Fool newsletter services recommend Salesforce.com and Google. 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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