I'm starting to feel a little lonely again, sitting here, way out on a limb, shouting that salesforce.com (NYSE:CRM) is cheap.

No sooner had Kaufman Bros. scampered out and joined me Wednesday, than salesforce reported Q2 earnings that sent Wall Street's finest ducking and running for cover. Piper Jaffray quickly downgraded the stock. And judging from media reports, Piper isn't the only banker worrying that growth hit a pothole at the software-on-demand pioneer. Analysts at Citi and Wedbush Morgan both voiced negative comments as well.

What is it that's got Wall Street analysts' pinstripes up in a bunch? Two words: "deferred revenue." (This refers to payments received by salesforce, but not yet booked as revenue on the income statement.) Simply put, the bankers fear it's not growing fast enough, and that this means salesforce isn't booking new orders at the pace they'd like to see.

Fear how much?
Enough to drive the stock price down 18%, despite salesforce having:

  • grown its Q2 revenues 49% to more than $263 million.
  • added marquee names such as AT&T (NYSE:T) and Harrah's to its stable of customers.
  • expanded relationships with Apple (NASDAQ:AAPL), General Electric (NYSE:GE), Google (NASDAQ:GOOG), and Qualcomm (NASDAQ:QCOM) -- and dozens more.
  • tacked on almost 300 basis points of gross margin (to 79.5%).
  • added more than 400 basis points' worth of operating margin, which now sits at 6.1%.
  • and more than doubled its earnings per share to $0.08.

That's a lot of fear
Indeed it is. And from salesforce's point of view, it's entirely unwarranted. According to CEO Marc Benioff, deferred revenue is not even "a metric that we use internally."

So what is a better metric?
Says CFO Graham Smith: "From a cash point of view, almost all of our customers are billed quarterly or annually in advance, and hence we believe that our cash flow performance is a far better measure of our operating performance."

And how's that going?
salesforce generated $40 million in free cash flow during Q2, up 60% year over year. Year-to-date, free cash flow has hit around $100 million, up nearly 120% over H1 2007. And over the past 12 months, the company generated a whopping $210 million in free cash flow.

If I might hoist Smith by his own petard for a moment, his "far better measure" tells a story not entirely dissimilar from the one that Wall Street's Wise Men are obsessing over. Like the slowdown in deferred revenue growth, the numbers above suggest a slowdown in free cash flow. To illustrate, extend the $40 million generated in Q2 for three more quarters, and you would wind up with a run rate of just $160 million -- 24% lower than the trailing-12-months figure.

Personally, however, I prefer to value companies based on facts rather than fiction -- what they have accomplished rather than what they might. Coming from that perspective, I can't help but notice that salesforce is now selling for 30 times its trailing free cash flow. Granted, that is a daunting number, but not if our analysts are correct in predicting 43% long-term growth for salesforce. If salesforce can achieve this high growth, than the company is reasonably priced.

And yet ...
Exactly. Whether you prefer to worry about slowing free cash flow generation, or slowing deferred revenue, either way, the concern remains the same: Slowing growth calls that "43%" assumption into question. And the farther that number falls, the more expensive salesforce's stock looks. So is there anything that might keep salesforce's growth engines humming?

Actually, there are two things. First, salesforce just inked its first-ever all-you-can-eat-buffet contract. Existing client Dell (NASDAQ:DELL) paid an undisclosed amount in Q2 to gain unlimited access to salesforce's Web-based software from now through 2011. Not only was this was the largest single contract salesforce has ever signed, it was also its first-ever "buffet" deal -- the kind of success that salesforce aims to repeat.

Salesforce's second ace in the hole is its recent purchase of product-support software maker Instranet, of which JMP Securities spoke so highly earlier this week. Benioff calls product service and support "one of our biggest opportunities," and believes that the Instranet deal will accelerate his company's growth.

Foolish takeaway
Is that just bluster? Typical CEO happy-speak? Only time will tell. For my part, I'm willing to bet that the man who built salesforce up from $50 million in revenues to a run rate nearing $1 billion in five years knows more about his business than the antsy analysts on the outside do.

And I meant that "bet" bit literally. Last night, I rated salesforce.com an "outperform" on Motley Fool CAPS. If you're of a mind to, come on over and watch how well (or horribly) it works out for me here.

Fool contributor Rich Smith does not own shares of any company named above, but if salesforce's stock price sinks much lower, he might have to change that -- not, however, before The Motley Fool's 10-day waiting period expires. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 681 out of more than 115,000 players.

Dell is a Motley Fool Inside Value selection. Google is a Motley Fool Rule Breakers pick. Apple is a Motley Fool Stock Advisor recommendation. The Fool has a disclosure policy.