Taking Clients to the Clouds

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

Since 2009 Salesforce.com (NYSE: CRM) is up nearly 600%. This is no small feat--the company posted better than expected global revenue growth of 30% on a constant currency basis. Operating cash flow totaled $283 million, a 33% increase year over year, but how does this translate into the bottom line long term.

First quarter deferred revenue hit $1.7 billion, up 30% from last years. On a full year basis the company is expecting revenue to reach 3.8 billion, up 26% from last year. This means that Salesforce.com will continue to book revenue gains into the future. The problem with Salesforce’s model seems to be its ballooning marketing costs.

Between 2012-2013, Salesforce.com saw gross profit increase $800 million, but it also saw expenses increase $860 million. With $750 million on the balance sheet, this company looks like it can continue its race to increase revenue and market share. But as it is doing this, tried and true companies operating in the cloud space are able to provide investors long track records of earnings.

Client relations

Salesforce.com has high profile clients like Home Depot that are taking advantage of the cloud and social media to drive sales. Salesforce was able to help Home Depot to market siding and roofing sales to general contractors using mobile and social collaboration software. This helped Home Depot better manage its inventory and supply chain to reduce cost, and drive revenue by preventing inventory from sitting idle or being short in areas around the country.

Competition

International Business Machines (NYSE: IBM) has recently amped up its game by acquiring SoftLayer. SoftLayer was a competitor to Salesforce that served over 20,000 clients and had 13 worldwide data centers. IBM’s addition of SoftLayer doubled their existing datacenter presence in the cloud. This acquisition will put all of SoftLayers clients in the crosshairs of IBM to cross sell their other services.

IBM is one of the few companies that laid out their business plan on how they would double their earnings per share in 5 years, from $10 per share in 2010 to $20 per share by 2015. The SoftLayer acquisition fits nicely into IBM’s plan to increase their revenue coming from software, as it shifts away from commoditized hardware. This shift in product offerings has hurt IBM on revenue, but has vastly increased the company's profitability.

Oracle (NYSE: ORCL) has the most to lose if the cloud starts to pick off large corporate clients from traditional database and software offerings from the software giant. Oracle’s bread and butter is in enterprise software, as well as collecting the recurring revenue that comes with the licenses.

Investor perspective

Both Oracle and IBM pay a modest dividend near 2% and have a long history of earnings, whereas Salesforce.com sees continual revenue growth, but is struggling to contain expenses at the same time. Since the beginning of 2012, Oracle has purchased 6 cloud computing companies, while rival IBM acquired 5. Both of these tech titans are able to then take those acquired software offerings and scale them up using their vast sales distribution networks. 

Salesforce reported a loss of $319 million on revenues of $3.28 billion, whereas Oracle earned $5.1 billion on $37.1 billion in revenue. Oracle has a market cap of $142 billion, while Salesforce is richly valued at nearly $22 billion, even without showing a profit. Oracle and IBM are quickly moving into the cloud computing space, while offering traditional customized software options to large organizations. Only time will tell if David will be able to fend of the Goliaths.

Foolish bottom line

Salesforce’s lack of profitability in its race to drive revenue and grab market share is long term oriented, however the lack of profit is keeping me on the sidelines. Both IBM and Oracle pay modest dividends and have large clients with recuring revenue and a track record of profitability. Conservative investors would be better suited with the old guard tech companies that are large enough to swallow up cloud computing companies to compete in this space. 

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Wes Patoka owns shares of IBM. The Motley Fool recommends Salesforce.com. The Motley Fool owns shares of International Business Machines. 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!

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