Shares of on-demand software maker salesforce.com (NYSE: CRM) are soaring today, up more than 15% at last count -- and rightly so. When the company reported earnings last night, the numbers were properly boffo:

  • "Record" revenues rose, up 25% to $394 million
  • Total customers contributing those revenues grew as well, up 30% year over year
  • Revenue guidance got "raised" to $1.6 billion for this fiscal year 2011
  • And free cash flow increased 77% to $48.3 million

Sure, there were other aspects to the story: The fact that non-GAAP earnings stagnated, while GAAP earnings per share actually decreased 35% to $0.11. The likelihood that even if salesforce succeeds in hitting its earnings guidance this year, its projected per-share earnings range of $0.43 to $0.45 per share will have this stock trading at a simply astonishing P/E ratio of perhaps 250.

Go, go, Goldman!
These quibbles aside, it looks like Goldman Sachs (NYSE: GS) was right on the money when it named salesforce an outperformer last month. My needling notwithstanding, it does now appear that ... Goldman isn't wrong about every tech stock it recommends. (Just yours, Nuance Communications (Nasdaq: NUAN) shareholders.) Judging from these numbers, Microsoft's (Nasdaq: MSFT) patent lawsuit doesn't seem to be slowing down salesforce a whit, and the company's still firing on all cylinders.

But is that enough?
If salesforce's guidance is any guide at all, fiscal 2011 sales will trump fiscal 2010 by a good 23%. And seeing as gross profit margins eked out about a 10 basis point gain over last year's Q2, while the gross for this year-to-date is even stronger, it would appear we can expect at least as good gains in profits (and free cash flow?) going forward.

Still, there's the nagging question of valuation still to be considered. With free cash now flowing through salesforce's doors at the rate of $285 million per year, salesforce shares sell for nearly 50 times annual cash production. Sure, free cash flow grew 77% in Q2 -- but sales appear to be increasing at only a 23% or 25% pace. And while more mature software makers Oracle (Nasdaq: ORCL) and SAP (NYSE: SAP) struggle to break the 80-percent barrier, salesforce's gross margins already regularly reach north of 80%, suggesting there's little room for further expansion there.

Long story short, as great a success as salesforce has been for us already, I have to wonder how much longer this growth story's "legs" might be. Long enough to justify paying the 50 times FCF cost of admission? I doubt it.

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