I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series.

Next up: salesforce.com (NYSE: CRM). Is this provider of Web-based business software the real thing? Let's get to the numbers.

Foolish facts

Metric

salesforce.com

CAPS stars (out of 5)

*

Total ratings

1,357

Percent bulls

53.6%

Percent bears

46.4%

Bullish pitches

97 out of 238

Highest-rated peers

Intuit, Autodesk, Adobe Systems

Data current as of Sept. 18.

Allow me to admit a bias before digging into what other Fools think. I'm the guy who recommended salesforce.com to our Rule Breakers subscribers last March. Those who bought are now sitting on a four-bagger. Many of you see that as a problem.

Chief among the concerned is one of my favorite colleagues, TMFDeej, who shorted salesforce.com in Motley Fool CAPS at $98.26 a share. The concern? Valuation.

I can understand why. The stock trades for 186 times trailing normalized earnings and 55 times its adjusted cash flow. Such heady multiples aren't sustainable by historical standards.

The elements of growth

Metric

Last 12 Months

2009

2008

Normalized net income growth

18.0%

66.3%

90.5%

Revenue growth

22.6%

21.3%

43.8%

Gross margin

80.6%

80.2%

79.5%

Receivables growth

35.4%

20.4%

21.1%

Shares outstanding

129.9 million

127.2 million

122.9 million

Source: Capital IQ, a division of Standard & Poor's.

This table shows mostly good signs, but there are a couple of concerns. Let's review:

  • While revenue growth is mixed, normalized net income growth has been on the decline, a bad sign for a company priced for outsized growth. I'm not panicking because cash flow growth is accelerating. Adjusted cash flow is up 71.3% over the last 12 months, Capital IQ reports.
  • Gross margin is improving with each passing year, a good sign.
  • Mildly troubling is the reversal in receivables growth versus revenue in the last 12 months. This isn't a huge concern because salesforce.com books revenue ratably over time. As such, receivables are bound to grow faster than revenue on occasion, as they did in 2007 and 2008.

Competitor and peer checkup

Competitor

Normalized Net Income Growth (3 Years)

Amdocs (NYSE: DOX)

(0.9%)

Microsoft (Nasdaq: MSFT)

8.1%

NetSuite (NYSE: N)

Not material

Oracle (Nasdaq: ORCL)

13.9%

SAP (NYSE: SAP)

(2.5%)

salesforce.com

18%

Sources: Capital IQ. Data current as of Sept. 18.

Not surprisingly, salesforce.com leads peers in long-term growth. The concern among bearish investors is that, seeing this, competition will get aggressive and introduce attractively priced alternatives.

No doubt that is a problem. But let's not forget salesforce.com is more than a decade old and has faced stiff competition before. It was, after all, salesforce.com that drove a hobbled Siebel Systems, once the market leader, into the waiting arms of Oracle in 2005.

Grade: Sustainable
Also, there are the developers to consider. Tens of thousands are building software applications to layer on top of salesforce.com. And its Force.com platform is hosting altogether new cloud-computing services. Too many are invested in the success of salesforce.com to see this growth story end soon. Short the stock at your peril.

Now it's your turn to weigh in. Do you like salesforce.com at these levels? Would you make it one of our 11 O'Clock Stocks? Let the debate begin in the comments box below, and when you're done, click here to get today's 11 O'Clock Stock portfolio pick.

You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.

For further Foolishness featuring salesforce.com:

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Adobe is a Motley Fool Stock Advisor selection. Microsoft is a Motley Fool Inside Value pick. salesforce.com is a Motley Fool Rule Breakers recommendation. Motley Fool Options has recommended subscribers open a diagonal call position in Microsoft. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares of any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool owns shares of Autodesk, Microsoft, and Oracle and has written covered calls on Autodesk. The Fool is also on Twitter as @TheMotleyFool, and its disclosure policy thinks Monty Python is sustainably funny.