Is salesforce.com Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does salesforce.com (NYSE: CRM  ) fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Salesforce's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's look at Salesforce's key statistics:

CRM Total Return Price Chart

CRM Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

138.6%

Pass

Improving profit margin

(232.3%)

Fail

Free cash flow growth > Net income growth

105.9% vs. (415.7%)

Pass

Improving EPS

(407.9%)

Fail

Stock growth (+ 15%) < EPS growth

104.9% vs. (407.9%)

Fail

Source: YCharts.
*Period begins at end of Q2 2010.

CRM Return on Equity Chart

CRM Return on Equity data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(238.2%)

Fail

Declining debt to equity

78.5%

Fail

Source: YCharts.
*Period begins at end of Q2 2010.

How we got here and where we're going
Salesforce has some rather divergent results -- the cloud computing leader earned only two out of seven passing grades, but those passing grades indicate more financial health than might be expected from the remaining failures. Despite overwhelming revenue growth over the past three years, the company's profit margins have collapsed. However, the growth of Salesforce's free cash flow has kept pace almost perfectly with its share price, which could indicate a more sustainable position than that presented by the bottom line. Which of these pictures is more accurate? Can Salesforce improve its profitability after years spent sliding? Let's dig a little deeper to see what the future may hold.

Salesforce and rival Oracle (NYSE: ORCL  ) have both been diversifying into other business application domains to augment their existing cloud-based software systems. Most notably, Salesforce has agreed to integrate its entire product line with Workday's (NYSE: WDAY  ) cloud- based human resources and finance applications. Fool contributor Tim Brugger notes that the partnership could produce the industry's first comprehensive cloud-based software solution for the entire range of an organization's needs. Salesforce might also be able to capitalize on the growing popularity of the Chrome OS, since its cloud-based enterprise applications are compatible with Chromebooks.

Fool contributor Anders Bylund points out that Salesforce and Oracle have entered into a nine-year-long agreement to provide mutual support for one another's most crucial platforms, which will effectively wipe out each company's primary weakness. While Oracle could leverage Salesforce's competitive advantage in cloud for some second-tier products like its Exadata data management platform, Salesforce can utilize Oracle's branding and monstrous list of customers to boost its revenue growth over the next several years.

Salesforce has also recently announced the acquisition of cloud marketing company ExactTarget (NYSE: ET  ) for approximately $2.5 billion in cash. Fool contributor Tim Brugger notes that the acquisition will enable Salesforce to develop "a world-class marketing platform across email, social, mobile, and the Web," using the marketing expertise of ExactTarget. In addition, the buyout provides many lucrative opportunities in a rapidly growing marketing campaigns market, as ExactTarget boasts more than 6,000 clients, including huge multinationals like Coca-Cola, Nike and Gap. According to a Gartner report, the customer relations management (CRM) marketing segment grew 21% in 2012, more than any other CRM category, so this deal certainly makes sense from a growth perspective. The addition of these massive  new customer bases to Salesforce's existing infrastructure could be exactly what it needs to turbocharge its earnings over the next few quarters.

Putting the pieces together
Today, Salesforce has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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