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1-Star Stocks Poised to Plunge: salesforce.com?

Based on the aggregated intelligence of 165,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, customer relations management (CRM) software specialist salesforce.com (NYSE: CRM  ) has received the dreaded one-star ranking.

With that in mind, let's take a closer look at Salesforce's business and see what CAPS investors are saying about the stock right now.

salesforce.com facts

Headquarters (Founded)

San Francisco (1999)

Market Cap

$12.4 billion

Industry

Application software

Trailing-12-Month Revenue

$1.4 billion

Management

Co-Founder/CEO Marc Benioff
CFO Graham Smith

Return on Capital (Average, Past 3 Years)

6.4%

Cash/Debt

$951.8 million / $467.5 million

Price-to-Earnings (CRM and Industry)

159 and 17

1-Year Return

105%

Competitors

Oracle (Nasdaq: ORCL  )
Microsoft (Nasdaq: MSFT  )
SAP

Sources: Capital IQ (a division of Standard & Poor's) and Motley Fool CAPS.

On CAPS, 45% of the 1,274 members who have rated Salesforce believe the stock will underperform the S&P 500 going forward. These bears include Endeavor1 and All-Star TSIF, who is ranked in the top 0.5% of our community.

Late last month, Endeavor1 touched on the stock's seemingly unsustainable price run:

A great offering, that seems to have just ballooned in price from emotion. Lots of firms would seem to have made big money on this that they will look to book at the first sign of sustained weakness in the market. This stock could fall 20% and there be no change in any narrative from either side of speculation right?

While our community acknowledges Salesforce's leadership position in the CRM space, they can't seem to get over the stock's nosebleed valuation. Salesforce might be posting a healthy gross margin and solid growth rates now. But many Fools argue that the company lacks the competitive moat to prevent well-financed software behemoths like Oracle, Microsoft, and SAP from eventually cutting into them -- and deeply. If that ever happens, CAPS All-Stars like TSIF warn that the stock has plenty of room to plunge:

I've learned and can accept many metrics of price appreciation that warrants a high P/E, P/B. In a market mover company, with high margins, high growth, and a wide moat, I can learn to respect a much higher valuation than warranted by current results. In the case of Salesforce.com, however, margins and growth aren't anywhere near what would warrant a P/B of over 11. Insiders are selling their "gifted" shares in Million dollar increments on a regular basis. At some point, while one can never have too much money, I'm guessing they will start taking time to enjoy some of it. The co-founder and CEO is now a Billionaire at age 45. ... Any bad news and deflation will occur rapidly. When and if that will occur however, is just a guess on my part, but in general, what goes up, will eventually stabilize at some appropriate altitude.

What do you think about Salesforce, or any other stock for that matter? If you want to retire rich, you need to protect your portfolio from any undue risk. Staying away from dangerous stocks is crucial to securing your financial future, and on Motley Fool CAPS, thousands of investors are working every day to flag them. CAPS is 100% free, so get started!

Fool contributor Brian Pacampara owns no position in any of the companies mentioned. Salesforce.com is a Motley Fool Rule Breakers pick. Microsoft is an Inside Value choice, and Motley Fool Options has recommended a diagonal call position on it. The Fool owns shares of Oracle. The Fool's disclosure policy always gets a perfect score.


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

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 17, 2010, at 12:00 PM, hartinfo wrote:

    It's all up to Fidelty. Between Fidelity and CEO Marc Benioff, they own 25% of all outstanding shares. As long as Fidelity keeps buying on the dips, they can control low level sell-offs. Marc on the other hand has been selling off $1,000,000 per DAY for months and months and months. So he's taken quite a bit off the table.

    Like the big tech bubble of 99, there is no way the financials and growth get you anywhere near the value of this stock.

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Brian Pacampara
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