Fools know the value of a stock split: zero. It's a non-event. Instead of a $20 bill in your wallet, you now have two $10 bills. So if they mean nothing, why do them? There are a few reasons, none of which has anything to do with whether the stock is a good investment. Here are the usual ones:
- To make the stock look cheap.
- To increase liquidity.
- To meet stock-exchange listing requirements.
- To express a bullish management sentiment.
Regardless of the reason, markets tend to view splits as positive events, and a company's shares can get a short-term boost from the news. But if the company isn't a good, long-term business, it doesn't matter if its shares split, or whether you buy them before or after.
A split decision
Business software provider salesforce.com (CRM 2.59%) is looking for shareholder approval to split its shares four-to-one because it believes investors and its employees don't like the high price. If it can whack the share price down to a quarter of what it trades at now, more people will want to buy it (that's the "increase liquidity" rationale noted above) and it will have happier employees when they get their stock options. Apparently there is low morale because shares trade for around $175 a stub, which will disappear at around $45 each.
Despite its elevated stock price, Salesforce has been accelerating the amount of money it loses each quarter. Over the last three years, revenue has grown at a 32% compounded annual rate, a prodigious achievement, though it was helped along by the numerous acquisitions it made. In 2012, Salesforce made five acquisitions, including Buddy Media for $736 million, and it bought seven companies the year before that.
Yet after peaking at $80 million in 2010, net profits have turned into net losses -- and by a significant amount. At the start of 2012 it had a net loss of $11.6 million; by the end of the third quarter trailing losses ballooned to $254 million, or $1.82 per share, largely as a result of the Buddy Media acquisition.
Four times as good?
By purchasing the social-media marketing firm, and linking it together with Radian6, Salesforce does create the potential for a powerful medium for companies to use the cloud to market and analyze their business. SAP bought networking and online commerce software developer Ariba for $4.3 billion, recognizing the convergence occurring between the cloud and business insight, while Oracle bought social-media marketer Virtue and then analytics analyzer Collective Intelligence for much the same reason. Microsoft (MSFT 3.90%) got into the act, too, buying Facebook-for-business platform Yammer for $1.2 billion.
Social media doesn't typically play a part in the mindshare surrounding Salesforce, but the customer relations specialist is weaving the online movement more tightly into the fabric of its business. Its Radian6 marketing and analytics division has become an important tool in fending off and beating back advances made by both Oracle and SAP. It was also enough to force IBM's hand to not be left behind, as last summer it bought cloud-based recruiting and talent management software maker Kenexa to provide "advanced social business and analytics capabilities to front-line business operations."
If Salesforce has an edge here, it's in being able to enhance its customers' understanding of their social media campaigns across the entire networking universe. And also to recognize a trend and jump on it. Through a partnership with Twitter, Radian6 customers have available to them the entire catalog of public Tweets to analyze consumer responses to cloud marketing campaigns, in addition to the existing ability to examine Facebook and LinkedIn efforts.
Split the difference
The problem is the hemorrhaging of money. It's hard to escape the thought that the four-for-one stock split is not being done for reasons other than minimizing the explosion of red ink. The $1.82 trailing loss becomes a not-so-horrific-looking $0.45 after the split. The reasons it's outlined for splitting its shares seem the weakest of the bunch because other stocks with higher share prices -- such as Google, Apple, and Amazon.com -- have even higher share prices but their trading volumes are well in excess of Salesforce. Lofty stock prices don't seem a deterrent to investing in them. And do people pass up or leave a job because a company has a high-priced stock?
No doubt the market liked the split announcement, as traders sent the stock to a new record high, but it's come back down in the days since and now trades below where it was before the news. The split may increase the liquidity of its stock, but it doesn't guarantee it will go up. I'm betting it will go down, so I'm maintaining my underperform rating on Motley Fool CAPS, but let me know in the comments box below if you think this split makes Salesforce a force to be reckoned with.
