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. Options & Futures

    What Does Quadruple Witching Mean?

    In a financial context, quadruple witching refers to the day on which contracts for stock index futures, index options, and single stock futures expire.
  2. Options & Futures

    4 Equity Derivatives And How They Work

    Equity derivatives offer retail investors opportunities to benefit from an underlying security without owning the security itself.
  3. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  4. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  5. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  6. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  7. Options & Futures

    Five Advantages of Futures Over Options

    Futures have a number of advantages over options such as fixed upfront trading costs, lack of time decay and liquidity.
  8. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  9. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  10. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
RELATED FAQS
  1. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  2. What is after-hours trading? Am I able to trade at this time?

    After-hours trading (AHT) refers to the buying and selling of securities on major exchanges outside of specified regular ... Read Full Answer >>
  3. How do hedge funds use equity options?

    With the growth in the size and number of hedge funds over the past decade, the interest in how these funds go about generating ... Read Full Answer >>
  4. Can mutual funds invest in options and futures? (RYMBX, GATEX)

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  5. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  6. 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 >>
COMPANIES IN THIS ARTICLE
Trading Center