Short-sellers have been about as wrong as you can be when it comes to salesforce.com (CRM +4.26%) this year. The stock is up more than 57%, crushing the S&P 500 over the same period.
Fools weigh in
Is the rally justified? A lot of Fools say no. Here's just a sampling taken from our Motley Fool CAPS database, where the majority have picked the stock to underperform.
"I'm not saying the product is bad or that I think the company will fail. But pick your valuation multiple, and this company is living back in 1999, not 2012," writes Foolish investor reeshaum who goes on to say:
Start with the fact that they have a GAAP loss. That means we're dealing with non-GAAP numbers, picked by management. But even with those, we are talking about an 83 P/E, 31 times free cash flow, and a PEG of 3.5. Yikes!
"Low earnings, high valuation, questionable balance sheet [insane goodwill]," writes All-Star Fool obstacle2.
"Too many big players getting into the cloud," writes callumturcan, another CAPS All-Star. "Salesforce isn't profitable yet, will probably have to start growing organically soon -- not just through acquisitions."
Of all the complaints, no one so perfectly describes the problem with Salesforce -- the one number you really should hate -- than Matt Maidhoff, who patrols our Motley Fool Rule Breakers discussion boards as TMFBreakerForce: "When cash flow really isn't cash flow anymore. Something's got to give."
Indeed.
One number to hate: Cash flow
When Salesforce rallied last week, it was largely due to a healthy third-quarter revenue beat. Investors would have done better to look at the cash flow statement. The numbers are, shall we say, unsettling:
- Contribution from exercised stock options nearly doubled.
- Contribution from prepaid expenses rose fourfold.
- Contribution from deferred revenue (i.e., cash paid for contracted services yet to be delivered) declined.
Artificial sweeteners weren't enough to keep Salesforce from reporting an 18% decline in cash from operations even as capital expenditures rose 47%. Yikes, indeed.
To be fair, this is a well-known issue with tech companies generally and cloud computing companies in particular. For example, NetSuite (N +0.00%) also generates a fair amount of cash flow from benefits related to stock-based compensation.
Both NetSuite and Salesforce are generous with options grants on the theory that recruiting and retaining the best talent creates an advantage in selling against larger peers. I think they're right, but I'd also be remiss if I didn't also point out the cost of transferring so much wealth from shareholders to employees.
Investors won't profit unless these companies generate a decade or more of outrageous growth. Fortunately, Salesforce is already on its way.
One number to love: Booked business
According to S&P Capital IQ, Salesforce has recognized about $2.9 billion in revenue over the trailing 12 months. Yet during a conference call with analysts last week, CEO Marc Benioff said the combination of deferred revenue ($1.3 billion) and business contracted but not yet accounted for on Salesforce's balance sheet equals $4.3 billion.
Let me repeat that because it's important: Salesforce has at least $3 billion in what it calls "booked business" that will appear on its financial statements in the coming quarters and years.
Forget about trying to guess when Salesforce will double sales amid increased competition from Microsoft (MSFT +1.63%), Oracle (ORCL +6.47%), and SAP (SAP +0.75%). It's already happened.
See the problem here, short sellers? You're betting against growth that may as well be contractually guaranteed. (And in many cases, is.)
Looking ahead
Skeptics will nevertheless point out the various ways in which rivals are going after Salesforce:
- Microsoft recently purchased Yammer for $1 billion in order to better compete with Salesforce's Chatter platform for social collaboration.
- Oracle is offering more of its software online as CEO Larry Ellison publicly spars with Benioff.
- And SAP is pitching its SuccessFactors platform as an alternative to some of Salesforce's online offerings.
So be it. More than anything else, what Salesforce's growing backlog of booked business tells us is that the shift to cloud-based platforms is real and gaining strength. Incumbents have no choice but to respond. Perhaps someday they'll slow the movement's momentum, but I doubt it. Do you agree? Disagree? Please weigh in using the comments box below.
