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Salesforce.com And A Valuation In The Clouds
Say this much for Salesforce.com (NYSE:CRM) - they make life hard on the value crowd by posting excellent growth. With a great third quarter and organic growth that much larger companies like SAP (NYSE:SAP), Microsoft (Nasdaq:MSFT), Oracle (Nasdaq:ORCL) and IBM (NYSE:IBM) could only hope to get, Salesforce.com keeps the argument alive that it can grow into a dominant software player and grow into its rich valuation.
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The Quarter That Was
By any reasonable standard, this was a hot quarter for Salesforce.com. Reported revenue rose 30% from last year's level. Likewise, deferred revenue and billings were strong. Deferred revenue rose 27% from last year, while billings climbed 35% annually.
Although not necessarily revenue metrics, the company did experience good renewals and lower churn. Looking further, the company's Chatter feature is now with 70% of its customer base in less than six months, while the Service Cloud has about 20% adoption so far.
On the profitability side, the growth was good but not as strong as the top line. GAAP operating income rose 17%, while non-GAAP operating income jumped 25%. Here is at least one place where value-oriented investors can snarl a bit. Ignoring employee compensation (whether its cash or stock) seems a bit ridiculous when quality employees are part of CRM's differentiating advantage, and less operating leverage overall is a bit of a worry.
The Road Ahead
Cloud computing and software as a service (SaaS) is unquestionably a hot area right now, not only as industry-changer, but in the investment community as well. Investors are certainly not suffering for absence of choice; not only are there enables like VMWare (NYSE:VMW), Red Hat (NYSE:RHT) and Citrix (Nasdaq:CTXS), but there's also platforms and applications like Salesforce.com, RightNow (Nasdaq:RNOW), and Taleo (Nasdaq:TLEO).
Hot as it is, does Salesforce.com have the staying power to last? Oracle and Microsoft are hardly trifling competitors. Perhaps even more serious is the threat from Google (Nasdaq:GOOG). It is hard to immediately think of a notable failure from Google so far, though perhaps the company is stretching itself in too many directions at once - taking a big step into the smartphone arena against the likes of Apple (Nasdaq:AAPL), while also battling Microsoft and Salesforce.com in the platform/application space.
The Bottom Line
Trading at over 10 times trailing revenue and nearly 90 times trailing EBITDA, it is easy to make quips about Salesforce.com having a valuation or investor base that is in the clouds. Certainly there is some basis for this; it takes relatively extreme assumptions to produce a cash flow-derived valuation that makes CRM shares look anything close to cheap. In fact, it takes something on the order of a 30% CAGR in free cash flow over 10 years to get to a target of $150. On the other hand, a liability-adjusted cash flow yield (LACFY) based on last year's free cash flow or this year's expected level (which, admittedly is not the generally accepted way to calculate LACFY) shows overvaluation, but no more so than a lot of other stocks in the market today - and those companies do not have the margin structure or leverage of Salesforce.com.
What it comes down to is this - Salesforce.com is a company built to throw off exceptional amounts of cash flow in the future, a company with excellent growth, and a company that is playing a leading role in how corporations approach their software needs. It is also a company with exceptional expectations and a hair-trigger investor base. Investors with a keen focus on value or nervous stomachs need not apply. (For related reading, take a look at Is Cloud Computing An Investable Trend?)
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IN PICTURES: 10 Tips For The Successful Long-Term Investor
The Quarter That Was
By any reasonable standard, this was a hot quarter for Salesforce.com. Reported revenue rose 30% from last year's level. Likewise, deferred revenue and billings were strong. Deferred revenue rose 27% from last year, while billings climbed 35% annually.
Although not necessarily revenue metrics, the company did experience good renewals and lower churn. Looking further, the company's Chatter feature is now with 70% of its customer base in less than six months, while the Service Cloud has about 20% adoption so far.
On the profitability side, the growth was good but not as strong as the top line. GAAP operating income rose 17%, while non-GAAP operating income jumped 25%. Here is at least one place where value-oriented investors can snarl a bit. Ignoring employee compensation (whether its cash or stock) seems a bit ridiculous when quality employees are part of CRM's differentiating advantage, and less operating leverage overall is a bit of a worry.
The Road Ahead
Cloud computing and software as a service (SaaS) is unquestionably a hot area right now, not only as industry-changer, but in the investment community as well. Investors are certainly not suffering for absence of choice; not only are there enables like VMWare (NYSE:VMW), Red Hat (NYSE:RHT) and Citrix (Nasdaq:CTXS), but there's also platforms and applications like Salesforce.com, RightNow (Nasdaq:RNOW), and Taleo (Nasdaq:TLEO).
Hot as it is, does Salesforce.com have the staying power to last? Oracle and Microsoft are hardly trifling competitors. Perhaps even more serious is the threat from Google (Nasdaq:GOOG). It is hard to immediately think of a notable failure from Google so far, though perhaps the company is stretching itself in too many directions at once - taking a big step into the smartphone arena against the likes of Apple (Nasdaq:AAPL), while also battling Microsoft and Salesforce.com in the platform/application space.
The Bottom Line
Trading at over 10 times trailing revenue and nearly 90 times trailing EBITDA, it is easy to make quips about Salesforce.com having a valuation or investor base that is in the clouds. Certainly there is some basis for this; it takes relatively extreme assumptions to produce a cash flow-derived valuation that makes CRM shares look anything close to cheap. In fact, it takes something on the order of a 30% CAGR in free cash flow over 10 years to get to a target of $150. On the other hand, a liability-adjusted cash flow yield (LACFY) based on last year's free cash flow or this year's expected level (which, admittedly is not the generally accepted way to calculate LACFY) shows overvaluation, but no more so than a lot of other stocks in the market today - and those companies do not have the margin structure or leverage of Salesforce.com.
What it comes down to is this - Salesforce.com is a company built to throw off exceptional amounts of cash flow in the future, a company with excellent growth, and a company that is playing a leading role in how corporations approach their software needs. It is also a company with exceptional expectations and a hair-trigger investor base. Investors with a keen focus on value or nervous stomachs need not apply. (For related reading, take a look at Is Cloud Computing An Investable Trend?)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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