salesforce.com, Inc. Earnings: Solid Growth Continues

salesforce.com (CRM -0.06%) reported earnings yesterday after market close. The key theme to the report was the company's continued -- and impressive -- revenue growth. But the stock's intensely forward-looking valuation continues to water down the stock's risk-reward profile.

salesforce.com offers the world's number one customer relationship management application. Image source: salesforce.com.

The results
Second-quarter revenue of $1.32 billion, up 38% from the year-ago quarter, beat the consensus analyst estimate for $1.29 billion. Similarly, non-GAAP EPS of $0.13 also came in slightly higher than the consensus analyst estimate of $0.12.

Chairman and CEO Marc Benioff, a co-founder who has been with the company since its inception in 1999, gave a nod to the company's hot growth story.

"Salesforce.com continues to be the fastest growing top 10 software company," Benioff said in the press release.

Benioff further emphasized salesforce.com's growth story when he announced yet another boost to the company's annual guidance:

I'm delighted to announce that we are once again raising our fiscal year 2015 revenue guidance by $30 million, to reach $5.37 billion at the high end of our range, which is a full year growth rate of 32%. We have now raised our fiscal 2015 revenue guidance by $170 million since we first initiated guidance last year.

Turning to a handful of acquisitions in the past several years to further scale the company's cloud offerings and to bolster its cross-selling opportunities, investors should look for operating expenses as a percentage of sales to decline over time. Such a trend points to effective integration as well as scalability of the company's organic offerings. Indeed, operating expenses are on the decline, down from 81.4% of revenue in the year-ago quarter to 79.2% in fiscal 2015 Q2, or 220 basis points. Even sequentially, operating expenses as a percentage of revenue fell 150 basis points.

The top- and bottom-line upside surprises, an improving operating margin, and another boost to annual guidance suggests the company is, for now, executing expertly on its growth plans.

But challenges remain
There are two issues for salesforce.com that plague the stock. While both can be effectively addressed if the company can truly continue to grow its business and scale operations over the long haul, investors in salesforce.com should understand these factors so they can keep an eye on them.

First, salesforce.com continues to report losses on a GAAP basis, reporting a loss of $0.10 per share in Q2.

"But wait! salesforce.com.com has been reporting robust free cash flow for a decade," some might argue. "Why is profitability an issue?"

The deal is that salesforce.com is able to collect revenue for many of its offerings before services are rendered. This is the company's deferred revenue. Deferred revenue for the second fiscal quarter of 2015 was $2.35 billion, 78% higher than its reported revenue for the quarter. But eventually salesfore.com has to deliver -- and delivering costs money. Until these services are delivered, the deferred revenue fluffs up the cash flow statement.

The other issue is valuation. Despite the company's excellent performance year-to-date, the stock is only up a few percentage points and trailing the S&P 500 by about five percentage points. Valuation seems to be the most likely culprit. salesforce.com's rosy valuation already prices in robust growth for years to come -- growth that investors are betting will catapult the company into GAAP profitability. The risk-reward trade-off simply doesn't scream "buy!"

To meet or exceed market expectations, salesforce.com will need to prove it can continue to find growth opportunities by capitalizing on shareholder-friendly acquisitions, boosting cross selling, scaling operations, and bolstering its value proposition as the go-to source for customer relationship management.

With yet another solid quarter in the bag, it's certainly not time to sell. But new investors should consider the risks carefully before they decide salesforce.com is a stock for their portfolio.