Nothing frustrates a value analyst more than a breakaway growth stock that keeps posting excellent results and a seemingly bullet-proof valuation. Salesforce.com (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.
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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 Salesforce.com'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 Salesforce.com 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, Salesforce.com 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", Salesforce.com is expensive. At these prices, Salesforce.com 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?)
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