salesforce.com Knows How to Grow

Salesforce.com (NYSE: CRM  ) is a heck of a polarizing stock.

The master of cloud-based business services has seen its shares gain more than 85% in the last 12 months, but more than 10% of the float is sold short. About 875 CAPS players love the stock, but 770 hate it. Our Rule Breakers team of analysts recommends that you buy salesforce.com, but the Big Short guys think you should, you know, sell it short.

But today, the bears have little reason to stir. Salesforce.com shares jumped as much as 10.2% overnight thanks to a tremendous first-quarter report.

Want proof? Here's the pudding.
Non-GAAP earnings of $0.28 per share on $504 million in revenue beat analyst targets and management guidance on both counts. In all fairness, earnings did fall short of the prevailing $0.31 consensus as of the last earnings report, when the company issued guidance well below that mark.

On the other hand, the second-quarter forecast beat Street expectations by a fair margin. You win some and lose some, eh?

Sales rose by 34% year-over-year, behind the stellar growth rates you see from fellow cloud rider VMware (NYSE: VMW  ) but ahead of Red Hat (NYSE: RHT  ) , TIBCO Software (Nasdaq: TIBX  ) , and Citrix Systems (Nasdaq: CTXS  ) . Deferred revenue is growing even faster at 38%, which means that salesforce.com continues to see orders outpacing billed services. Long-term contracts are on the rise.

The crux of the matter
Like Red Hat and fellow speed demon Netflix, salesforce.com pumps every available dollar into accelerated growth, which means ballooning sales and marketing expenses. The lack of earnings growth is a common criticism of this growth model, but I think it's nothing but sound business.

Would you rather see the company sit on a growing pile of cash while it leaves tons of sales opportunities on the table? How about if Microsoft swooped in to steal those unclaimed customers? Salesforce.com is just not going to let that happen. As CEO Marc Benioff told analysts on last night's earnings call, "Microsoft's desperate strategy of underfunding, pricing with undifferentiated and highly proprietary products basically has had the same impact on our business as the Windows tablet and Zune did against the iPad and iPod. We call Microsoft's strategy, 'the Zune strategy.'"

Ouch, Marc. He also compared Oracle's (Nasdaq: ORCL  ) strategy to how IBM (NYSE: IBM  ) operated 50 years ago. But it's true. Mr. Softy doesn't stand a chance with vanilla products going up against salesforce.com's award-winning sales management suite -- as long as salesforce.com keeps pushing its pedal to the metal.

What to do now?
As skeptical as some of my peers are on salesforce.com, I think the company is doing all the right things and pushing all the right buttons. Come back in five years and you'll see the fruits of today's enormous marketing costs. The stock price might be a little rich for your blood today, but this is the kind of ticker you need to watch closely so you can buy on the inevitable drops along the way.

Salesforce.com remains a major force in the enterprise software sector, though much larger competitors always lurk in the shadows. The best way to stay on top of the company's unique challenges and opportunities is to keep an eye on the burgeoning cloud computing market, and keep up with news on salesforce.com itself.

The Motley Fool recently introduced a free My Watchlist feature that allows users to stay ahead of the curve and receive current news on companies like salesforce or its competitors. To get up-to-date salesforce.com news and analysis, add the company to your watchlist today:

Fool contributor Anders Bylund owns shares of Netflix, but he holds no other position in any ticker mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Microsoft, Oracle, and International Business Machines. Motley Fool newsletter services have recommended Netflix, Microsoft, Salesforce.com, and VMware. Motley Fool newsletter services have recommended buying puts in Netflix. Motley Fool newsletter services have recommended creating a diagonal call position in Microsoft. Motley Fool newsletter services have recommended a short position in Salesforce.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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