Will salesforce.com Outperform in 2011?

Each year, we take a look back in order to look ahead. We do this by industry, by trend, and ultimately by stock. Here's a closer look at salesforce.com (NYSE: CRM  ) , Fool style.

Foolish facts

Metric

salesforce.com

CAPS stars (out of 5) *
Total ratings 1,493
Percent bulls 53.9%
Percent bears 46.1%
Bullish pitches 101 out of 257
Highest rated peers Net 1 UEPS Technologies, Tyler Technologies, Actuate

Data current as of Dec. 30.

Short sellers must blow a fuse every time they see this ticker. It's almost enough to make someone create a mocking cartoon. Oh, right. Somebody already did that.

There's a sad truth behind the hilarity. Far too many traders bought salesforce.com on the promise of momentum, only to see the stock give back some gains in recent weeks. At its present valuation, continued volatility is likely.

As Foolish investor valuehunter007 wrote earlier this month:

Looks overvalued. [salesforce.com] may prove me wrong on this but I'm going ahead with red thumbing anyways. PEG ratio of astonishing 3.5 and cash returns just 1.8! Everything absolutely has to go right for it to be able to continue making big strides.

Looking back to look forward
Maybe, but we've heard this refrain before. In 2010 as in other years, the skeptics were often proved wrong.

  • In February, the bears were growling. Shares of salesforce.com fell by 5% despite 22% revenue growth and an 82% profit improvement in the fourth quarter. Free cash flow grew by 29%, to $217 million. None of that spurred the sell-off, though. Management predicted just 16% to 17% full-year growth for 2010, below what the Street had called for.
  • Two months later, Foolish colleague Dave Mock attended NetSuite's (NYSE: N  ) partner conference and found a company building a value chain to compete with salesforce.com. Although it may take years for NetSuite to become a serious threat, Google (Nasdaq: GOOG  ) already has NetSuite integration for its Google Apps productivity suite. Dave's right to encourage Fools to take this company and its cloud platform seriously.
  • By August, the case was settled and salesforce.com was back to pleasing the Street. The stock rallied by more than 15% after reporting a 25% increase in revenue, a 77% increase in free cash flow, and a 30% increase in its customer count for the second quarter.
  • The next month, I sought to answer the question I heard everyone asking: Is it worth shorting salesforce.com? My response: no. Tens of thousands of developers had committed to the platform and were still writing code to enhance it. They'd create more than enough value to punish short sellers, I argued.
  • By November, the bulls' 2010 victory was complete. Third-quarter revenue soared by 30% as salesforce.com's paying customer count rose 28%. "Can nothing stop salesforce?" asked my Foolish colleague Rich Smith. Apparently not.

Looking at the financial performance, it's easy to why salesforce.com's stock was one of the software industry's top 10 performers this year:

Fiscal 2010-2011 Performance

Q4 2010

Q1 2011

Q2 2011

Q3 2011

Revenue growth 22.3% 23.6% 24.8% 29.8%
Normalized net income growth 96.7% (8.4%) (17.9%) 4.2%
Gross margin 80.8% 81.0% 80.3% 80.9%
Return on capital 5.3% 5.3% 4.4% 5.1%

Source: Capital IQ, a division of Standard & Poor's.

And here's what analysts expect from salesforce.com over the next two years, according to data compiled by Capital IQ:

Capital IQ Estimates

Fiscal 2012

2013

Revenue estimate $2,020.7 million $2,439.1 million
Normalized profit per share estimate $1.51 $1.93

Source: Capital IQ. Data current as of Dec. 30.

Foolish outlook: bullish long-term, bearish short-term
Only the blind or the perma-bull would argue that salesforce.com is reasonably priced at current levels. Don't buy if your plan is to hold for only a few months.

The stock needs to catch a breather for a while as newer initiatives such as the Force.com platform and Database.com database-as-a-service catch on and add to the earnings pie. Over the long term they will, which is why I'm keeping this as an active recommendation in our Motley Fool Rule Breakers service.

Now it's your turn to weigh in. What do you think of salesforce.com's prospects at current prices? Use the comments box below to explain your thinking. You can also join me in rating salesforce.com in Motley Fool CAPS.

What will be next year's best stock? The Motley Fool has created a brand new free report called The Motley Fool's Top Stock for 2011. In it, we reveal the little company set to profit from the broadband Internet expansion. Get instant access by clicking here -- it's free.

Interested in more info on the stocks mentioned in this story? Add salesforce.com, NetSuite, Google, Microsoft, or Amazon.com to your watchlist.

Google and salesforce.com are Motley Fool Rule Breakers recommendations. Google and Microsoft are Motley Fool Inside Value picks. Amazon.com is a Motley Fool Stock Advisor selection. Net 1 UEPS is a Motley Fool Global Gains pick. Motley Fool Options has recommended that subscribers purchase a diagonal call position in Microsoft. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He owned shares of Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of Google and Microsoft and is also on Twitter as @TheMotleyFool. When it comes to stocks, the Fool's disclosure policy is a lookie-loo.


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