Please ensure Javascript is enabled for purposes of website accessibility

Will 2016 Be's Worst Year Yet?

By Tim Beyers - Jan 23, 2016 at 9:17AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The stock has been a proven winner for many years. Here are three things that could derail it in 2016.

Salesforce has been drawing crowds to its conferences has been drawing developers and customers in increasing numbers. Can the momentum continue in 2016? Image source: Salesforce.

Few stocks have have ever defied doubters as well -- or as consistently -- as (CRM 3.50%). A six-bagger over the past decade, Salesforce has become the poster company for cloud computing while multiplying revenue from just $176.4 million in fiscal 2005 to $5,373.6 million last year, a 30-fold increase, according to S&P Capital IQ.

Yet this growth story is far from over. CEO Marc Benioff is dead-set on getting to $10 billion faster than any other company in the history of the enterprise software market -- an industry that includes names such as Microsoft and Oracle, among others.

He's making plenty of progress. As the chart below shows, both revenue and cash from operations have improved steadily over the trailing 12 months, leading the stock up more than 20% over the same period. The S&P 500 is off more than 7% in that time.

CRM Chart

CRM data by YCharts.

The open question is whether the rally can continue. History says yes: Salesforce has topped analysts' consensus revenue estimates in each of the past four quarters, S&P Capital IQ reports. The company also exceeded profit targets in three of those four periods, usually by $0.02 per share.

With that in mind, it's tough to see how anyone would presume Salesforce will disappoint investors in 2016. But if it happens, it'll because of one of these three dreadful outcomes came to be:

  1. CEO and co-founder Marc Benioff leaves or takes a diminished role in the business. The wort-case scenario. Benioff is the visionary for Salesforce, and its chief cheerleader. He's also the top executive shareholder with a 5.5% stake in the business. Were he to leave, it would signal an uncomfortable transition that would torpedo the stock for a time.
  2. The long-term contract pipeline dries up. Salesforce likes to tout "unbilled deferred revenue" as an indicator of the sustainability of its business. The theory is simple: The more long-term deals the company signs, the more predictable its growth and cash flows become. By contrast, if unbilled deferred revenue remains flat or starts declining, it could indicate saturation. Salesforce's pricey valuation would unwind in a hurry in that scenario.
  3. Management fails to meet or top estimates in two consecutive quarters. Benioff and team have a habit of setting a low bar and finding a way to leap over it, pushing the stock to higher highs. That's the power of momentum; when you have it, you just keep winning. Lose it, and you'll suffer harsh consequences. Here, a one-quarter revenue and earnings miss might be brushed off as an anomaly. Two misses would be a signal and the beginning of a new narrative -- "Salesforce has peaked!" -- and could unleash a run on the stock.

Now it's your turn to weigh in. Do you see Salesforce winning or losing in 2016? What other potential gotchas could snare investors? Keep the conversation going in the comments section below.

Tim Beyers owns shares of The Motley Fool owns shares of Oracle. The Motley Fool recommends Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Salesforce, Inc. Stock Quote
Salesforce, Inc.
$188.61 (3.50%) $6.37

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/11/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.