This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

This stock goes to 11...
For years, the friendly analysts at Goldman Sachs (ahem) have preached the gospel of software-as-a-service (SaaS), while maintaining a firm agnosticism on the concept's pioneer. No longer. Goldman finally caved to the inevitable yesterday, picking the date of the biggest market crash in months as its time to enter the stock.

Yes, Fools, it's true. Goldman has become a fan of salesforce.com (NYSE: CRM). Lamented Goldman: "We have held a bullish stance on SaaS, but have stayed to the sidelines on salesforce.com." That said, "the evolution of the company and the environment over the past 12 months has changed our view." According to the analyst, the CRM clouds are clearing, salesforce is making progress penetrating its customer base, and "competitive pressures" (presumably, from rivals such as Oracle (Nasdaq: ORCL), a key salesforce competitor) have faded.

Goldman predicts we'll see upside to Street estimates when salesforce reports Q1 2011 earnings later this month. Specifically, Goldman expects pro forma profit of $1.28 per share this fiscal year, $1.65 in fiscal 2012, and $2.09 in fiscal 2013. But is the analyst right?

Let's go to the tape
Maybe not. For all that it's reputed to be the sharpest blade on Wall Street, Goldman's actual record doesn't always back up its rep. Within the Software sector, for example, our CAPS scorecard actually shows this megabanker making more wrong guesses than right scoring just 37% accuracy. Among its gems are:

And as long as we're on the subject of Goldman's special brilliance, take another look at those "pro forma" earnings estimates up above. You'll note that what they add up to, basically, is growth in the high 20s -- basically right in line with Street estimates. So I'm not quite sure why Goldman's thinking it's discovered some great new bit of wisdom about salesforce.

To the contrary, if you ask me, it looks like Goldman may be boarding this train a bit late. I mean, sure, from a qualitative point of view, Goldman's probably right about salesforce's top dog-status within the SaaS-sphere. Fool veteran Starrob recently dropped us a note calling the company "a formidable rival to Google (Nasdaq: GOOG) and Microsoft (Nasdaq: MSFT)" (on the Rule Breaker discussion boards, subscription required). So it sure does look like salesforce is weathering the competition just fine.

In fact, you could even argue that the competition has been co-opted. One of Goldman's favorite pro-salesforce arguments is that its alliance with VMware (NYSE: VMW) in the VMforce venture opens up Force.com and has thrust salesforce into the lead in "Gen 2 of SaaS." And VMforce, as you know, is "the first enterprise cloud for Java developers" -- Java now being an Oracle product.

Then again, it's not the quality of Goldman's industry analysis that worries me here. It's the lack of logic inherent in its math. Consider: salesforce stock trades for 135-times last year's earnings. Even for a 30% grower, which Goldman now agrees salesforce will become, that seems a mite pricey. Why, even if you judge salesforce by the more forgiving yardstick of free cash flow, the $217 million the firm generated in 2009 is only enough to bring its price-to-free cash flow ratio down to about 50 -- still a pretty penny.

Foolish takeaway
Listen, Fools. I don't hate salesforce. To the contrary, I've argued in the stock's favor plenty of times -- when the price was right. Problem is, after doubling in price over the last 12 months or so, I don't believe salesforce still offers investors the bargain that it once did. Not at this price.