Why Do You Still Doubt salesforce.com?

Shares of salesforce.com (NYSE: CRM  ) are holding strong after reporting another quarter of strong results and higher guidance. Short-sellers must be getting nervous. And annoyed.

Among tech stocks, few names generate a more visceral response than salesforce.com. Don't believe me? Try looking up the phrases "salesforce.com" and "overvalued" together in Google News. Here's the sort of headlines you'll see, courtesy of Seeking Alpha:

  1. 3 Overvalued Stocks With Extreme PEG Valuations
  2. 6 Unbelievably Overvalued Stocks I'm Shorting Now
  3. 3 Reasons Why Salesforce and Its Stock Price Are Hanging on by a Thread

Fools tend to agree. Motley Fool CAPS investor JTMcGee calls the company "mismanaged and overpumped." Another, 20MalbecRoble05, says the company "sounds gimmicky" and calls the share price "far too high." A Fool known as cubanstockpicker could only laugh in picking the stock to underperform. Mocking. Derision. Just another day in the life of a salesforce.com bull.

Why the bears have no reason to growl
Here's my problem with all this. Nowhere in these pitches do I see any mention of the differentiating aspects of salesforce.com. It's all shorthand, as if Microsoft's (Nasdaq: MSFT  ) competing Dynamics suite replicates salesforce.com precisely, down to the very last feature. Nonsense.

Drive-by traders can be forgiven for getting it wrong. Dynamics and the core salesforce.com product do both offer salesforce automation and customer relationship management (CRM). And so ingrained is CRM into salesforce.com's history that when CEO and co-founder Marc Benioff took the company public in 2004, he chose the acronym for a ticker symbol.

Yet today, salesforce.com offers a lot more than its namesake CRM suite. What Microsoft, Oracle (Nasdaq: ORCL  ) , and SAP (NYSE: SAP  ) offer for those willing to host and manage infrastructure software, salesforce.com and its closest peer, NetSuite (NYSE: N  ) , offer for those who'd rather rent infrastructure and spend dollars on customizing or creating new apps.

Use the Force.com
So while skeptics see salesforce.com as a one-trick digital pony, in reality the company is every bit the aspiring platform provider that Microsoft has become for PC software. This, in a nutshell, is why salesforce.com continues to deliver staggering losses to short-sellers.

Consider the developer statistics. During last week's call with analysts, Benioff said that there are now more than 400,000 coders using Force.com to write and deploy some 240,000 apps in the cloud, all hosted on salesforce.com's servers. That's a massive number, and it illustrates just how important salesforce.com has become as a cloud computing enabler.

My point in mentioning this isn't to convince you that salesforce.com is cheap. Only the delusional would call a stock trading for 326 times earnings a bargain. But you also can't call it expensive and ignore the underlying platform. You can't brush off hundreds of thousands of developers, pretending they don't exist. Unless, that is, you hate money.

Hello? It's history calling. Here's your cold cup of coffee...
Every significant growth story in the history of tech has, at one time, traded for north of 100 times earnings -- just as salesforce.com does today. Two names you're sure to recognize:

  1. Apple (Nasdaq: AAPL  ) traded for 297 times earnings on Feb. 18, 2003. Investors with the courage to buy then are up more than 4,700% today.
  2. Google (Nasdaq: GOOG  ) traded for more than 260 times earnings on Jan. 18, 2005. The stock has more than doubled since, besting the S&P 500's 5% loss for the same period.

In all, Capital IQ found 51 companies worth $500 million in market cap trading for at least 100 times earnings five years ago. Six of those went on to at least double, including Baidu, which like salesforce.com sits proudly on our Motley Fool Rule Breakers scorecard.

I know, I'm cherry picking, here. But I've published this research before and the results always come back the same. Triple-digit P/Es simply aren't the doomsday indicator bears would like us to believe they are. A lot depends on growth, market positioning, and the underlying strength of the business. I have a hard time believing today's skeptics have taken anything other than its massive P/E ratio and competition with Microsoft into account when shorting salesforce.com. Don't be surprised if they get burned.

Do you agree? Disagree? Weigh in using the comments box below. And if you're in the mood for more stock ideas, try this free video. You'll walk away with a better understanding of the cloud computing revolution that salesforce.com is tapping into, as well as a winning pick from our Motley Fool Rule Breakers scorecard. Click here to start watching -- it's 100% free.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Apple, Google, and Oracle at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of Microsoft, Google, Oracle, and Apple. Motley Fool newsletter services have recommended buying shares of Microsoft, Apple, Google, Salesforce.com, and Baidu. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended shorting 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.


Read/Post Comments (3) | Recommend This Article (1)

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 August 22, 2011, at 9:55 PM, Brooklynvestor wrote:

    I've made good money shorting CRM. This beauty short play is down about 30% from its mid-July high.

    Have you noticed that, despite spectacular revenue growth, Salesforce can't seem to make money for shareholders? That expenses are growing faster than operating profit? That GAAP earnings are on the decline? That the company lost money on a GAAP EPS basis this quarter and forecasts a GAAP loss for FY2012? That even based on its non-GAAP projected FY12 earnings, forward P/E is approximately 85?

    You portray Microsoft as a PC based business model. Take a look at Windows Azure and Office Live. Look at what Amazon is doing in the cloud. Is Salesforce making any money with Force.com? I can't find any evidence of that in the financial statements. Marc Benioff can talk about the cloud till the cows come home; doesn't mean his company can make money from it. I believe Wall Street has swallowed Bemioff's bait whole, believing that Salesforce has exclusive rights to the cloud and will reap all the profits. Those of us in the industry know that other players are better positioned and better capitalized to compete in this game.

    Did you know that the company spent $278 million for a plot of land for a new campus? The building is likely to cost at least a couple hundred million more.

    But Metallica is playing at Dreamforce, so that's cool. On the recent conference call Mr. Benioff talks of "social enterprise license agreements" and friending your Toyota. These half-baked ideas about social networking for businesses are supposed to cover the half-billion dollar price tag of the new campus.

    Here we have a perfect storm of a growth tech bubble, a charismatic CEO, the overvalued and little understood concept of the cloud, weak fundamentals, and macro turmoil. As I said, a beauty short.

    Short CRM.

  • Report this Comment On August 23, 2011, at 11:53 AM, climbwitarope wrote:
  • Report this Comment On August 26, 2011, at 6:51 PM, TMFMileHigh wrote:

    @Brooklynvestor,

    >>I've made good money shorting CRM. This beauty short play is down about 30% from its mid-July high.

    Well done. I like to see Fools profiting from their own stock ideas. Now, let's take your main criticism one at a time.

    >>Have you noticed that, despite spectacular revenue growth, Salesforce can't seem to make money for shareholders?

    Incorrect. Shareholders who bought when we recommended the stock in Rule Breakers have made quite a bit of money. (It's a four-bagger on the scorecard.)

    >>That expenses are growing faster than operating profit? That GAAP earnings are on the decline? That the company lost money on a GAAP EPS basis this quarter and forecasts a GAAP loss for FY2012? That even based on its non-GAAP projected FY12 earnings, forward P/E is approximately 85?

    These are the main concerns and they are all legit. My long-term bull thesis for salesforce.com is baed on Benioff making good on transforming salesforce.com into a $10 billion a year company in the decade ahead.

    >>Did you know that the company spent $278 million for a plot of land for a new campus? The building is likely to cost at least a couple hundred million more.

    Did you know that much of salesforce.com's infrastructure spending is on floor space near Internet peering points for high-speed access? This isn't cheap, but it is the proper strategy:

    http://www.fool.com/investing/general/2011/03/14/for-salesfo...

    >>On the recent conference call Mr. Benioff talks of "social enterprise license agreements" and friending your Toyota. These half-baked ideas about social networking for businesses are supposed to cover the half-billion dollar price tag of the new campus.

    They're only half-baked if customers aren't using social media as a business tool. I'm seeing enough anecdotal evidence to suggest they are, and we know more than $3 billion is being spent on social ads. Collaborative technology isn't a new idea -- if salesforce.com can integrate it properly than the sales will follow.

    >>Here we have a perfect storm of a growth tech bubble, a charismatic CEO, the overvalued and little understood concept of the cloud, weak fundamentals, and macro turmoil.

    I don't buy the idea that cloud computing is a little understood concept. Too many are buying into it.

    In wireless alone, high-speed investments are expected to top $50 billion within a few years, mostly foe the delivery of entertainment and business services while on the go. (Mobile is a big focus for salesforce.com, as well.)

    Add it all up and I see the buy-and-install software business being disrupted in ways that are difficult to predict. Yes, that creates risk for those willing to buy salesforce.com. Yes, there's likely to be short-term volatility -- especially with the market we're in -- but I see nothing that cogently argues Benioff is wrong.

    Give me *that* argument, and you've got a chance to change my mind.

    Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

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