Tech investors don't just love hot growth stories, they adore them and will push up multiples to eye-popping levels to have them. That's all well and good so long as the growth holds up, but as these stories transition from growth to execution, the stock returns can fall off sharply.

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That leads me to my primary worries about Salesforce.com (NYSE:CRM). There's no arguing that Salesforce.com has built itself into a leading software as a service (SaaS) vendor, and a competitive threat to companies like Oracle (Nasdaq:ORCL), SAP (NYSE:SAP), Microsoft (Nasdaq:MSFT) and IBM (NYSE:IBM). What I do wonder about, though, is whether there's a similar level of intrinsic profitability in the business model and whether the company is generating the real new customer growth that investors are paying so much to get.

Q1 Results Certainly Delivered on the Expectations
There had been ample chatter going into CRM's quarter that the numbers might miss, but the Street seemed quite satisfied with the performance that the company actually delivered.

Revenue rose 38% from last year and 10% from the fourth quarter, and delivered a slight beat (about 2%) relative to sell-side guesses. While deferred revenue was up 48% as reported, changes in the contract terms (longer durations, different payment schedules) inflated that number and the more comparable result was more like about 32%.

CRM's margin story continues to be a decidedly mixed one. GAAP gross margin fell about a point and a half from last year's first quarter and about 20 basis points from the fourth quarter. On the operating level, the company reported an even larger loss on a GAAP basis. Investors willing to accept non-GAAP results will see 45% year-on-year operating income growth, but about 4% sequential erosion.

As these results suggest, CRM sees a huge impact from stock option expense. If investors want to look past it, that's their right. It's also worth noting, though, that SG&A expense increased 13% sequentially and CRM continues to struggle to show real sales leverage.

SEE: Earnings Quality

What's the Real New Growth Rate?
CRM reported 34% billings growth this quarter and new billings growth of 14%. I wonder, though, if that's really the true growth rate. Given the adjustments in contract terms (longer invoicing periods), I think the actual "apples to apples" new billings growth may in fact be lower - probably still better than Oracle's mid single-digit rate of growth, but maybe not in the double-digits anymore. To be clear, though, this is just my opinion and my own modeling and I may be factoring in more impact from the invoicing changes than the company is actually seeing.

Competition Is There, but Is CRM Still Winning?
Even if Salesforce.com's real new billings growth rate isn't in the mid teens, the company is likely still growing faster than the market. At a minimum, the acquisitions made by companies like Oracle and SAP seem to be shaking up the market, and they may be driving business towards CRM (not an uncommon occurrence in the wake of M&A).

Longer term, I think there's a risk that Microsoft's Office Live will sap some of CRM's momentum, and I wouldn't write off Oracle or IBM either. At the same time, there are multiple growth avenues left to the company - simply addressing compliance concerns in the financial sector regarding the Chatter product would open up some sizable growth opportunities.

SEE: Mergers and Acquisitions

The Bottom Line
Clearly I'm not completely sold on Salesforce.com, either from the perspective of its new customer growth or its margins. Even if I'm wrong in my concerns about new billings growth, the sales leverage issue is a real one and a good enough reason in my mind to not pay over eight times trailing revenue.

The growth expectations baked into Salesforce.com's valuation are already enormous. Free cash flow will have to grow at a compound rate of 20% over the next decade just for this stock to be fairly valued today. Assuming relatively standard free cash flow conversion, that suggests Salesforce.com has to be about as big in 2022 as SAP is today and I'm just not sure they can do that when so many of their rivals are focusing on the same markets.

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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