Dueling Fools
The Siebel War
The Bull Rebuttal
By
Paul Commins (TMF Buster)
Man, this kid is good. For a moment, he almost had me believing that Siebel stock is over-priced. Fortunately, I have calm, cool numbers on my side.
A look back at the ERP king
To get a sense of Siebel's future, let's look to the past, to the last must-have enterprise software rollout. By most accounts, the eventual winner of the ERP shootout was German gunslinger SAP (NYSE: SAP). Here are the past 10 years' worth of annual revenue figures for SAP (converted from German marks and euros to U.S. dollars by the corresponding conversion rate on 12/31 of each year):
SAP Total Revenues by Year
(in millions)
Year Rev($) Gain
1990 334
1991 466 40%
1992 515 10%
1993 635 23%
1994 1182 86%
1995 1881 59%
1996 2397 27%
1997* 3374 41%
1998 4819 43%
1999 5135 7%
*used 12/31/98 euro conversion rate
This table shows us that the ERP leader cracked the $1 billion revenue barrier in 1994. Over the next four years, through the end of 1998, SAP grew revenues by an annual average of 44% before the dramatic slowdown in '99.
A prediction for the CRM king
Given these numbers for SAP, I don't see much of a stretch in predicting five years of 50% revenue growth in front of Siebel. It's just now crossing the $1 billion revenue mark in a hot market, the point at which SAP went on to post four years of 44% ERP growth.
Beyond five years, I believe that Siebel is likely to transition smoothly into its post-CRM hyper-growth stage, more so than SAP did into the land beyond ERP. I can see, for Siebel, at least five more years of 20% revenue growth on the tail end of the CRM boom.
How can I make these bold claims?
1) The CRM market will be bigger than ERP
CRM is targeted at essentially all companies, big or small, manufacturing or service. Not every company has a huge, complicated web of manufacturing resources to coordinate, but every business has customers to pamper.
2) Siebel products do not require an all-or-nothing commitment
When a manufacturing giant commits to an ERP vender like SAP, they are turning over, to the software, a giant web of interconnected back-office processes. In contrast, Siebel's CRM line is available in dozens of individual modules, from which customers can pick and choose, according to their particular needs and currently installed software base.
3) Siebel has nothing like the competition SAP faced
During its heyday, SAP fought off fierce competition from rivals such as Oracle, PeopleSoft (Nasdaq: PSFT), Baan (Nasdaq: BAANF), and J.D. Edwards (Nasdaq: JDEC). Given the relative lack of competition, Siebel should actually increase share in the growing CRM market. So Oracle is giving away one of its CRM modules. This is a sign of strength? Enterprise software costs big money and hangs around for a long time. It's not the kind of commitment that goes to the lowest bidder.
4) Siebel has top-notch, seasoned management
Siebel boasts three ERP-tested veterans. Tom Siebel and co-founder Patricia House both came over from Oracle, and newly appointed Chief Operating Officer Paul Wahl was a senior executive in SAP's American operations. This kind of experience should help Siebel anticipate the kinds of events that derailed SAP, like the end of the ERP boom, the switch to Interent-based software, and the pre-Y2K sales slowdown.
Value of Siebel stock should the prediction come true
Building on this argument, let's assume that year 2000 revenue growth will come in at 100% (conservative given the rate year-to-date!), 2001-05 revenues will grow at 50%, and 2005-10 revenues will grow at 20%.
Further, assume Siebel posts a 20% net profit margin in 2010, typical for mature software companies, and sports a price-to-earnings ratio of 30. Finally, assume shares outstanding grow by 0.5% annually to reach 441 million in the year 2010.
If all these assumptions are accurate, you could buy Siebel today and sell it in the year 2010 at a 15% annual gain. To get a feeling for how this return would be affected by variations from these base assumptions, consider the following table:
Row heading = Assumed Siebel P/E in 2010
Column heading = Difference in growth rate versus assumptions. For example, the -10% column assumes that Siebel's revenues grow by 100% in 2000 (doesn't change), 40% for the next five years (-10% from 50%) and 10% for the following five years (-10% from 20%).
Table value = Annual rate of return on Siebel stock bought at $99, the current price, and sold in 2010. For example, the bold 15% figure in the center of the table matches my base assumptions. If we bump up expected revenue growth by 5% and assume a 2010 P/E of 40, the return jumps to 23% annually.
P/E Revenue Growth
Ratio -15% -10% -5% Base +5% +10% +15%
10 -9% -5% -1% 3% 7% 11% 16%
20 -3% 2% 6% 11% 15% 19% 24%
Base 1% 6% 11% 15% 20% 24% 29%
40 4% 9% 14% 19% 23% 28% 33%
50 7% 12% 16% 21% 26% 31% 36%
This table shows just how much risk we take on when we buy one of today's tech high fliers. A notch either way on the down side and we're suddenly looking at average market returns, or worse.
The way this bull sees it, however, Siebel is well on its way to joining the upper echelon of enterprise software vendors. Relative to many of today's high-growth choices, this 15% return prediction even feels a little safe. Tom Siebel's commitment to customer service should keep his company growing smartly for years to come.
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