If you're currently hunting for a new job, you've probably come across Taleo (Nasdaq:TLEO), a provider of on-demand human resources recruiting tools. The company's clients include 47 of the Fortune 100, which likely had something to do with Deloitte LLP naming it to the prestigious Technology Fast 500, honoring some of the fastest growing companies in North America. With accolades like these, it's not surprising that Taleo's stock is up 191.2% year-to-date. For those who bought early in the year when its stock price was below $10, congratulations. Sell, and move on. For those considering investing in Taleo at these inflated prices, I'll give you four reasons to avoid doing so.

Lots Of Revenue and Nothing to Show for It
Taleo has a client list a block long. It's a veritable who's who in corporate America. The Fortune 100 helped drive revenue through the roof, increasing sales by 226.9% in just six years. Unfortunately, the company accomplished this while sustaining $15.2 million in operating losses. If we were back in the late 1990s, this type of performance would warrant a $100 share price. Thankfully, we're not. In its second quarter, which ended June 30, Taleo's revenues grew by 29.5% while its operating loss grew by an astounding 83.2% to $1.27 million. For the first six months of 2009, the company's operating loss was $3.3 million, more than double a year earlier.

Meanwhile, Taleo's main competitor in human resource recruiting technology, Kenexa (Nasdaq:KNXA), managed to deliver a small operating profit of $1.86 million in the second quarter on a 30.1% drop in revenues. It isn't great, but profits are the name of the game in the public markets. (Learn this easy-to-understand technique of analyzing a company's financial statements and reports, see Introduction To Fundamental Analysis.)

Plenty of Options
I've always wondered why investors, especially institutional ones, would want to own shares in a company that can't seem to make a profit. I suppose it's like the sports team that gives an aging superstar a second or third kick at the can despite showing no recent flashes of greatness. Taleo does have profit-making potential. Well, potential doesn't put your kids through college. There are several profitable options to choose from if you absolutely need a technology fix. Among the competitors Taleo lists in its most recent 10-K are Oracle (Nasdaq:ORCL), SAP (NYSE:SAP) and ADP (NYSE:ADP). Between them, their operating income was $14.19 billion in the trailing twelve-month period. Save yourself some grief and go for the solid single or double. Home runs are for speculators.

Valuation
Let's assume for a second that Taleo is in fact a profitable business, which it's not. Given its current valuation, there is no way a growth-at-a-reasonable-price investor would even contemplate making an investment in Taleo. Benjamin Graham wouldn't invest in a stock if the price-to-earnings ratio multiplied by the price-to-book ratio was more than 22. Taleo's is 108 and that's assuming the forward P/E of 24 (according to Yahoo! Finance) actually is achievable. Remember, this company hasn't been profitable for most of its existence, nor in the first two quarters of 2009. In order to reach analyst estimates for 2009, Taleo will have to deliver 78 cents per share in net profit in the second half of the year. It might do so, but history's not on its side. This company is much too expensive in my opinion.

CEO Compensation
I've never met Taleo CEO Michael Gregoire. I'm sure he's a standup person. However, current investors should wonder about his total compensation in 2008. Gregoire earned $2.98 million in 2008, which includes $2 million in stock and option awards. Just $400,000 was for his actual salary. This seems fair given the type of business. However, the incentive portion of his compensation is ridiculous. This is a business with $200 million in revenue and little or no profit. Compare this to Keith Busse, CEO of Steel Dynamics Inc. (Nasdaq:STLD). His total compensation in 2008 was $4.3 million on revenues of $8.1 billion and operating income of $855.2 million. Someone's overpaid here and it isn't the steelmaker. (The proxy statement can help determine whether a CEO is well compensated - or just overpaid, see Executive Compensation: How Much Is Too Much?)

Bottom Line
I think you know by now where I stand on Taleo stock. This isn't a keeper, although I'm sure there are enough believers out there to continue pushing the stock ever upwards. The markets never cease to amaze me.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Home & Auto

    Understanding Rent-to-Own Contracts

    They can work for you or against you. Here's how to negotiate a fair one.
  2. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  3. Home & Auto

    Avoiding the 5 Most Common Rent-to-Own Mistakes

    Pitfalls that a prospective tenant-buyer could encounter on the road to purchase – and how not to stumble into them.
  4. Home & Auto

    Renting vs. Owning: Which is Better for You?

    Despite the conventional wisdom, renting might make more financial sense than you think.
  5. Investing Basics

    Explaining Options Contracts

    Options contracts grant the owner the right to buy or sell shares of a security in the future at a given price.
  6. Home & Auto

    When Are Rent-to-Own Homes a Good Idea?

    Lease now and pay later can work – for a select few.
  7. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  8. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  9. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
RELATED TERMS
  1. Theta

    A measure of the rate of decline in the value of an option due ...
  2. Equity

    The value of an asset less the value of all liabilities on that ...
  3. Derivative

    A security with a price that is dependent upon or derived from ...
  4. Security

    A financial instrument that represents an ownership position ...
  5. Series 6

    A securities license entitling the holder to register as a limited ...
  6. Internal Rate Of Return - IRR

    A metric used in capital budgeting measuring the profitability ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!