Nothing frustrates a value analyst more than a breakaway growth stock that keeps posting excellent results and a seemingly bullet-proof valuation. (NYSE:CRM) offers growth investors a choice not unknown to those who enjoy a good adult beverage or two - quality does not come cheap. So the question for investors is whether they are comfortable paying single-malt prices for a story that does not have that kind of age just yet.

IN PICTURES: 4 Biggest Investor Errors

A Hot End to a Great Year

The sea change that is cloud computing is not stopping, and neither is CRM's growth. Revenue rose about 29% this quarter with 9% sequential growth - beating the average estimate, though not exceeding the highest estimates out there. The company also announced that billings grew 36%, while the year-end customer count was 27% higher and the company's deferred revenue was 33% higher.

CRM's profitability performance is more mixed. Gross profit rose 27% for the quarter, but the company significantly ramped up expenses across the operating spectrum. Even investors who buy the notion that stock compensation expense is not a "real" expense (the main difference between the company's GAAP and non-GAAP operating income figures) have to contend with the reality that operating income fell on a year-over-year basis. Granted, spending on R&D and sales may very well help further the company's competitive edge, and the company's trailing cash flow is not problematic, but this is what passes for a black mark on CRM's performance these days.

The Road Ahead

There is no questioning's prime real estate in the cloud platform space these days. Competitors Google (Nasdaq:GOOG), Microsoft (Nasdaq:MSFT), Intuit (Nasdaq:INTU), SAP (NYSE:SAP) and Amazon (Nasdaq:AMZN) are still formidable, still have ample R&D, etc. The reality, though, seems to be that is winning, and success breeds more success in the software space.

Does CRM have a shot at becoming the "next Oracle (Nasdaq:ORCL)"? Why not? This is still a young and developing market, but CRM has clearly stolen the march on many of its would-be (or wanna-be) rivals. Eventually CRM will have to extend itself into complementary lines of business, but that's a concern for a relatively far-off tomorrow.

The Bottom Line

Here and now CRM is expensive, but the single-malt analogy can come into play again here. Good stuff, especially good stuff that only comes in limited quantities, is never cheap. So, yes, does have a high valuation, and only a very few names - like SuccessFactors (Nasdaq:SFSF) - carry a higher multiple. If investors want cloud stocks but do not want to pay cloud prices, that means taking a shot with names like Microsoft or EMC (NYSE:EMC) - companies that have many good qualities, but not nearly the same high-octane mainline exposure to cloud.

All of that said, and with a straight-up admission that almost any value analysis on CRM will come off as curmudgeonly and decidedly "old school", is expensive. At these prices, pretty much has to become the next Oracle to validate its multiple. But for today's growth investors, the good times are definitely here and getting even better. (For related reading, also check out Is Cloud Computing An Investable Trend?)

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

Related Articles
  1. Stock Analysis

    Will WYNN Continue to Rally?

    Wynn Resorts has experienced a rally recently. Will it remain a good bet?
  2. Stock Analysis

    Don't Be Fooled by the Market's Recent Rally

    The bulls won for a bit in early October, but will bears have the last laugh?
  3. Stock Analysis

    Will Twitter's Stock Find its Wings Soon?

    Twitter is an enigma to many investors, but its story is pretty straightforward.
  4. Stock Analysis

    8 Solid Utility Stocks for a Bear Market

    If you're seeking modest appreciation, generous dividend payments and resiliency, consider these eight utility stocks.
  5. Stock Analysis

    Why Phillips 66 (PSX) is a Solid Long-Term Bet

    Here's why Phillips 66 will likely remain one of the world’s largest and most profitable companies for a long time to come.
  6. Stock Analysis

    3 Resilient Oil Stocks for a Down Market

    Stuck on oil? Take a look at these six stocks—three that present risk vs. three that offer some resiliency.
  7. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  8. Stock Analysis

    Is Pepsi (PEP) Still a Safe Bet?

    PepsiCo has long been known as one of the most resilient stocks throughout the broader market. Is this still the case today?
  9. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  10. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  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

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!