Buyer Beware With This Pricey Stock

Worldwide Invest Better Day 9/25/2012

Our goal here at the Motley Fool is: To help the world invest. Better.

In that spirit, we've devoted a large portion of our time this September to letting the world know what it means to invest. Financial literacy isn't one of our country's strong suits, and we'd like to do what we can to change that.

In that spirit, I'll be spending this week and next revealing three of The Motley Fool's most oft-recommended stocks among our premium services, and three stocks our analysts think you should be wary of.

So far, I highlighted one little-known stock our analysts are very bullish on, and one well-known company that's still worth getting behind.

On the flip side of the coin, I've also revealed one popular stock to be wary of, and I'll be highlighting a second such stock today.

The power of cloud computing
When I was young and too sick to go to school, I would sit in my dad's office. Every day before leaving to head home, he had to back up all of the electronic files in the company's system by putting it on a disk and bringing that disk home.

If there were a fire, electrical problems, or other act of nature, the company could lose all of its electronic files and spend months figuring out the mess. And that doesn't even begin to speak to the software that would've been lost.

Fast forward twenty years later, and we live in a very different world. There's no longer a need to back-up the company's information anymore, or spend millions on software, as the company uses the cloud computing services provided by salesforce.com (NYSE: CRM  ) . If the term "cloud computing" is new to you, click here for a quick explanation.

My dad's not alone, either. Salesforce, along with rival Rackspace Hosting (NYSE: RAX  ) , are smaller companies that got the jump on bigger stalwarts like Oracle (Nasdaq: ORCL  ) and IBM (NYSE: IBM  ) . Between 2009 and 2011, Salesforce increased revenue 74%. Our own David Gardner realized the potential of this service to transform the computing needs of businesses early on. He recommended the stock to members of his Rule Breakers service back in January of 2009. Since then, the stock is up an impressive 443%!

But there's more to this story
If you read to the very bottom of all of our articles, we state: "We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors." We take that very seriously, and it's why some people complain that they get conflicting advice from the Fool.

So while David Gardner and his Rule Breakers still believe in Salesforce, other services aren't quite as bullish. In April of 2011, senior Big Short analyst John Del Vecchio thought the stock should be shorted. Del Vecchio focused on the company's non-GAAP accounting measures, lack of operating leverage over bigger rivals, and increased competition from big boys like IBM and Oracle.

Shortly thereafter, Matthew Richey of Alpha followed suit. He focused on the fact that the company had increased its headcount (the number of employees) by 47% in one year, and that it would soon be paying higher taxes.

Indeed, Salesforce actually reported negative earnings in 2011 as it continues to fund its growth. The move is necessary if the company wants to win the battle for the cloud, but it can be worrisome for investors. The company is also focusing on gaining a technological edge, utilizing Fusion-io's (NYSE: FIO  ) data delivery technology to ensure the best possible customer experience.

What's a Fool to do?
Obviously, there are some conflicting opinions on the future of Salesforce. The difference between GAAP and non-GAAP accounting, for instance, plays a big role in how our analysts view the company -- and that can be very complicated for the beginning investor to wade through.

If you'd like to take the first step toward becoming a better investor and understanding these differences, jump over to our special page: InvestBetterDay.com. On Sept. 25, we're taking a day to celebrate the art of investing, and we encourage your participation. Head on over to the site now to continue your own personal investing voyage.

Fool contributor Brian Stoffel does not own shares of any of the companies mentioned. The Motley Fool owns shares of Fusion-IO, Salesforce, Oracle, and International Business Machines. Motley Fool newsletter services have recommended buying shares of Rackspace Hosting and Salesforce, as well as creating a synthetic long position in International Business Machines. Motley Fool newsletter services have also recommended shorting Salesforce. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (2) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 11, 2012, at 12:32 PM, Darwood11 wrote:

    "There's no longer a need to back-up the company's information anymore, or spend millions on software, as the company uses the cloud computing services..."

    Well, I don't know what cloud the author lives in or on, but in fact, I do think it is vital to back up business information on local NAS, portable hard drives or other systems. The internet is not infallible, and neither are some of these "cloud" server systems. This has been demonstrated by recent glitches in the cloud. I am of the opinion that using it as the sole recipient of critical data is dangerous.

    Don't misunderstand me. I do understand the issues, but the cloud is best used as a "backup" of the backups. 99% of the businesses in this country are "small" businesses with less than 500 employees. How do they back up their data? Do they? Of course they should.

    One of my favorite experiences was a client who had critical (and I mean CRITICAL) data stored on what they thought was a perfect backup system. Sure enough, one day they experienced a failure of the server systems. No problem, just restore from the "perfect" backups. Oops, it seems the data on the backups was data, but it was also corrupted beyond any use.

    One of the issues of facing all businesses is reliability of backups and access. BTW, this is something all investors should also consider for their personal financial information.

    Remember Murphy's Law? "If it can go wrong, it will, and always at the most inopportune time." I've experienced two hurricanes or their immediate consequences, numerous power outages, etc. Before anyone draws any conclusions, I and my company are situated in the Midwest.

    But despite any and all types of failures, and using various computer systems since about 1976, I've never experienced a loss of critical data.

    But, as we know per Murphy's Law, there will be a first time.

  • Report this Comment On September 11, 2012, at 12:38 PM, TMFCheesehead wrote:

    Darwood11--

    I appreciate the words of wisdom. Fool on!

    Brian Stoffel

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