Is the Cloud Big Enough for All of These Giants?

The move to the cloud has been quite powerful. Even for businesses that aren't 100% sure what the cloud is, they still know they should be in it. That's been great news for investors of Salesforce.com (NYSE: CRM  ) .

Shares are up nearly 500% over the last five years, and growth in the cloud market is expected to continue. But, the valuation raises some questions. Can Salesforce grow fast enough to justify its premium valuation to its cloud-focused peers?

Growth via a key acquisition
Salesforce's quarter containing January was very strong; revenue and billings came in above consensus. Billings were up 37% year-over-year for the fourth quarter, and the backlog was up 29%. It appears to have some of the best exposure to the CRM markets. With the acquisition of digital cloud marketing company ExactTarget last year, Salesforce has impressive upsell opportunities. 

The IT market is very large, and Gartner believes that worldwide IT spending will hit $3.8 trillion in 2014. Compare that to Salesforce's annual revenue of $4 billion. Thus, the company is looking to capture even more of that market and has a big opportunity to do so, hence the acquisition of ExactTarget. 

When Salesforce purchased ExactTarget, it gained access to approximately 6,000 customers, which include the likes of Nike and The Gap. The ExactTarget strategy could be one of the more underrated opportunities for Salesforce. With ExactTarget, Salesforce can provide customers with marketing capabilities that compliment existing products and services.

The company is also tackling new industries including offering industry-specific versions of cloud software. Some of the most notable industries include health care, auto, and financial services.

How does the competition stack up?
Other major players in the cloud space include Microsoft (NASDAQ: MSFT  ) and Oracle (NYSE: ORCL  ) . After going head-to-head for a number of years, Salesforce and Oracle became strategic partners in 2013. Salesforce is also one of Oracle's key customers, and recently signed a 10 year deal with Oracle. But, Microsoft is now a key partner for Salesforce, as ExactTarget uses Microsoft's SQL Server. 

Oracle is making a bigger push into the infrastructure market, which could be a positive for its business model, focused on portability between the cloud and on-premises systems.

As far as the whole cloud market discussion goes, Microsoft appears to be on the outside looking in. The company's appointment of Satya Nadella as CEO was a big positive to get into the cloud space, as Nadella was the head of the company's cloud business before becoming CEO. But, it appears Microsoft is making a push toward a different side of the market than Salesforce, which includes bringing the cloud to the consumer. It recently launched Office for iPad, which is part of a bigger move to push its Office 365 and OneDrive offerings.

These three companies are targeting different areas of the market, and their working relationships help make the competition a bit friendlier.

How shares stack up
Salesforce trades at a P/E of 80, based on next year's earnings estimates. That's quite high compared to other major application software players, including Oracle, which trades at a P/E of 12.6 based on next year's earnings estimates. Similarly, SAP has a P/E of 21, and Adobe's is 31.

But, analysts expect Salesforce to grow earnings an impressive 30% annually over the next five years. Of the 44 analysts following the stock, 84% have either a "buy" or "strong buy" rating on the stock.

Bottom line
While the valuation appears expensive, Salesforce is still a growth story. The company has been capturing more IT market spend via acquisitions. Investors looking to gain exposure to the fast-growing cloud and CRM market should give Salesforce a closer look. 

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