This Enterprise Resource Planner Might Not Deliver

tarun 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) reported its third quarter results with its revenues surging up by 35% to $788 million on the year while losses were reported at $249.6 million. Long-term investors might not be convinced by the combination of revenue growth with negative profitability.

Salesforce.com’s Silver Linings

The company has grown phenomenally across the globe. Revenues in America have grown by 38%, by 29% in Asia and surprisingly by 29% in Europe where other companies are finding difficult to barely survive. The company has a good customer base and with its expanding offerings and marketing strategies the company seems to be moving in the right direction. Unilever and Emirates are embracing Salesforce.com's social and mobile cloud technologies which are gaining wide acceptance.

What Concerns Me

The company relies a lot on equity issue when it is unable to meet its debt or cash requirements. The issue of fresh equity dilutes an investor’s holdings in the company and raises their concern over the company’s ability of generating sufficient cash to repay its debts and invest in its future projects. It might mean the company is either not managing its funds well or is unable to generate adequate amount of cash from its operations.

Stock-based compensation distributed to motivate its employees will continue to help Salesforce.com. However, if the share price is negatively affected (i.e. prices start falling), it will further burden cash requirements as employees will prefer cash over shares. Shareholders should further note that a company generally uses its shares as a mode of payment when it feels that its stock price is overvalued.

Can We Buy This Resource Planner

SAP AG (NYSE: SAP) is the world leader in the enterprise resource-planning software industry. Its most recent quarterly sales of $14.23 billion and its net income of $3.44 billion speaks greatly about its performance. SAP’s revenues have increased sustainable over the period of the last ten years. The growth in revenue exceeds the industry average of 1.4%. The operating cash flow for the company has also improved along with a strong balance sheet which has a low debt-equity ratio.

The company’s stock price has grown compared to last year and has further upside potential. The only thing that bothers me about SAP is its non-diversified business structure because of which it might face difficulty in the changing business environment. In a dynamic economy the stock price should improve and deliver good performance to its investors.

Oracle still rules

Oracle (NYSE: ORCL) is a maker of enterprise software and has delivered high profits consistently. The company’s quarterly profit margin was 24.86% in the third quarter of 2012 while its competitors, Salesforce.com and HP have reported losses. Despite the great performance, the critics believe that the changes in the business, like the rise of the cloud network, would affect Oracle's future.

As per the earnings reported on Aug. 31 the company had generated $14 billion in cash from operations which shows Oracle knows how to convert its profits into cash. With such great cash reserves the company is better placed to acquire businesses and make strategic investments unlike its rival Salesforce.com whose cash reserves are on a decline. Oracle is definitely an undervalued stock at its current price from its cash reserves standpoint. Oracle will also provide system service through the cloud network thereby tapping iton the small business market by charging its clients. My money is on Oracle.

Final Words

The ever improving revenue figures from all its business destinations like America, Asia and Europe gives a positive vibe about investing in Salesforce.com. On the other hand its unconventional accounting policies and its negative correlation of increasing revenue and falling profits seem to wave red flags. The revenue growth also does not look sustainable and I would advise readers to stay away at this time.


tarunbachhawat has no positions in the stocks mentioned above. The Motley Fool owns shares of Salesforce.com and Oracle. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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