Is salesforce.com (CRM) overpriced?

Posted on May 8, 2012 by

1


A friend shared some interesting information about salesforce.com (CRM). Here’s a summary:

read related articles

CRM’s P/E ratio is 492

That’s right.  salesforce.com’s stock price is four hundred and ninety two times earnings (as of May 2012). NASDAQ projects the ratio to be over 1,500 in 2013.  Check it out for yourself.

If you are not familiar with PE ratios, lower numbers are better — they indicate a better price value. 492 is an extremely high number.  As a comparison, consider Apple Computer, currently the most valuable company ever. One could argue that a high PE ratio would have been justified several years ago, because Apple’s growth was projected to be so significant. Currently, Apple has a PE ratio of 14, and in it’s heyday it never touched 300.

A typical “aggressive growth” stock has a P/E ratio in the low twenties. Salesforce.com may be a decent company, but to justify this PE ratio they will have to someday be as huge as Apple. Are they a future Apple? Do they deserve a PE ratio higher than the highest number ever for the most valuable company on Earth?

Another similar indicator is PEG ratio (price earnings / growth). Lower PEG ratios are better.  GOOG’s PEG ratio is 0.89.  CRM’s is 54!

In CRM’s defense, their CEO Benioff claims that the company is pouring revenue back into their infrastructure instead of providing earnings. They could presumably raise their earnings if they took those funds as profit. Still, 492 is a startling number.

but salesforce.com has a decent product

Salesforce.com has created an innovative cloud-based Customer Relationship Management (CRM) product. My company considered using them as they are among a handful of the top companies in this space. The company is also diversifying into cloud services (see link) and targeting players like amazon.com who seem to dominate this market. They claim to have “invented” cloud computing.

how did CRM arrive at this high PE ratio?

The CEO Benioff has an outsized ego that he leverages to relentlessly pump the stock. He tells us that the best predictor of the stock price is the company’s guidance.  In other words, don’t pay attention to the analysts.  Here’s a quote from his appearance on Jim Cramer’s Mad Money (MSNBC):

The best indication of our future revenue is our guidance, and you’ll see that in  this quarter we are raising our guidance for the fourth  quarter and we initiated a fiscal year guidance for next year that is well above where all the other analysts are…. we have to really get into looking at our guidance as the best predictor of future revenues moving forward.  Jim, we had a great quarter, we’re doing amazing.  we’re doing amazing and that’s why we are able to tell you that in the fourth quarter, for example, we’re ahead of where everyone else is, and for the fiscal year we’re just seeing something amazing next year.  in fact for the fiscal year, jim, we’re looking at guidance of well over 2.9 billion and hitting that 3bn run rate, and that’s where we are right now.

Here are some more reasons CRM arrived at this high PE ratio. And some reasons to believe this price is not right:

they use “aggressive” accounting practices to pump up earnings

Here’s a quote from a story by Eric Savitz:

Salesforce.com’s results for the July 2011 fiscal year would have been 79% lower on a GAAP basis and 30% lower on a non-GAAP basis if the company used the most conservative accounting and investment practices used by other large software companies.

Benioff’s response: “ludicrous.”

CRM’s CFO was a defendant in a stock price manipulation suit

The suit was brought in 2000 for manipulation of Nuance common stock, and for materially misstating earnings, purportedly to sell at an inflated price.

suit 1: http://www.iposecuritieslitigation.com/NUANCE.PDF

suit 2: http://securities.stanford.edu/1017/NUAN01/2002425_r01c_0120320.pdf

Larry Ellison is a sharp critic

In this video the CEO of Oracle tells us that Benioff doesn’t know how his own business works. There’s more about the feud in this Huffington Post article. Maybe that’s not such a big deal.  There are lots of very successful people on Ellison’s enemies list.

insiders are selling like crazy

In the last 12 months (as of May 2012) insiders are selling 20 times more shares than they’re buying.  Check it out for yourself at NASDAQ.  As a comparison, the ratio is closer to 1.0 at Google.

Info about CFO selling: http://www.mmdnewswire.com/pr-distribution-103877.html

Info about VP of sales: http://www.mmdnewswire.com/pr-distribution-103879.html

they spent $278M on a new campus, then backed out

Check out the story here.  Maybe not a big deal, but still an indication of dramatic changes in direction, not a sign of a stable hand at the tiller.

what does it all mean?

There are two possibilities.  Either the company really is poised for amazing growth (really super amazing growth) or it is on a bubble.

In any case, if CRM is indeed on a bubble, it may take some time before it dives.  One way to make a low-risk bet on the situation is to buy puts with a long expiration date.

Correction

I’ve been informed that CSCO during the internet bubble was the most valuable company ever.

Advertisements