My Case Against Salesforce.com
Shmulik 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) is a $22 billion internet-based business. Its primary product is customer relationships management (CRM) software, which sales professionals use to keep track of customers. Salesforce is the number one customer relationship management software company. And it's an early entrant in "cloud computing." It delivers its software over the Internet. That's great for small businesses, because it eliminates the need to own a server, install, upgrade, and maintain software. I firmly believe that this Wall Street darling is in trouble for the following several reasons.
Growth is slowing
Once upon a time, Salesforce was growing rapidly. The year it went public, 2004, sales grew 88%. Had it kept that up until the present, it would now be making $4.5 billion in sales. Instead, it's only barely passing the $3 billion mark. But, 2005 was the last year Salesforce's revenue growth topped 80%. Though investor belief in it continues unabated, Salesforce's hyper-growth phase is a thing of the past. It's gone and it's never coming back.
In fact, despite the increase in sales year-over-year, losses have greatly increased, moving from $0.02 per share in 2010 to more than $0.56 per share today. When sales go up and bottom line goes down, there's usually an over-exuberant M&A activity going on.
An acquisition craze
Over the last three and a half years, Salesforce.com has made 46 acquisitions and spent a total of $4.6 billion in stock and cash. It bought Radian6 in May 2011 for $336 million, Buddy Media in June 2012 for $736 million, and ExactTarget this month for $2.5 billion. All three companies were unprofitable. The companies were acquired at prices ranging from eight times sales (Radian6 and ExactTarget) to 18 times sales (Buddy Media). Paying so much for these unprofitable companies makes it extremely unlikely that Salesforce.com will ever make a profit on these acquisitions. Instead, at some point in the future, it's likely to trigger large goodwill write-downs. This will only exacerbate losses even further.
Not alone in the game
Salesforce's fat gross margins have attracted competitors to the table. The company gets 90%-plus of its revenue from subscriptions and support. That part of the business earns 85% gross margins. That's incredibly high margins. And that's why Microsoft (NASDAQ: MSFT) and Oracle (NYSE: ORCL) have also decided to take part in the game.
Last year, Microsoft said its CRM software, Dynamics CRM, was available in 40 markets and 41 languages. It also said it would offer Salesforce and Oracle CRM customers low promotional pricing for the first 12 months. Microsoft is charging $34 per employee per month, versus Salesforce's Professional edition at $65 per employee per month and Enterprise's edition at $125 per employee per month.
Oracle's CRM on Demand starts at $75 per month. And pricing isn't the only edge that Microsoft has. Microsoft Dynamics CRM is integrated with Microsoft Outlook, the hugely popular email application, and Microsoft Office. And while Salesforce might have a lot of valuable applications, and might still have a more robust and popular CRM product than Microsoft, it doesn't have Microsoft Office.
On its other front, Oracle is the largest provider of enterprise software (software for big companies) in the world. Its CRM product also integrates neatly and easily into its other systems. In addition, Oracle is a $144 billion gorilla which can buy its way into any sector via M&A activity with the cash it generates. It can easily take the CRM crown from Salesforce.com.
Valuation makes no sense
You can buy shares of Microsoft for a forward price-to-earnings of only 11x, and price-to-sales of 3.5x. You can also buy shares of Oracle for a forward price-to-earnings of only 9.8x and price-to-sales of 3.8x. Or, you can buy shares of the mighty Salesforce.com for a hefty forward price-to-earnings of 66x and price-to-sales of 7.5x. I believe the right choice is very clear. Salesforce.com is incredibly expensive and lacks the proper future growth to support such an exuberant price tag.
The market doesn't believe it, but Salesforce.com is a bubble only waiting to burst. Its growth has long stalled, it pays no dividends, and its competitors in the field are the ruthless, mostly large corporations out there. There's not a single factor to support its unbelievably high valuation and price tag. Invest accordingly.
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Shmulik Karpf has no position in any stocks mentioned. The Motley Fool recommends Salesforce.com. The Motley Fool owns shares of Microsoft and Oracle.. 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!