Three months ago, I took a look at the Q2 earnings report from Motley Fool Rule Breakers recommendation salesforce.com
Shows you how much I know. Turns out, that price was a bargain.
On-demand software, on-demand profits
Salesforce shares are soaring 16% (and counting) today after the company stunned the skeptics once again:
- Revenues -- up 30% year over year
- "Deferred revenues," which indicate future growth prospects -- up 27%
- Net paying customers -- those were up too, by 28%
Fact is, about the only thing not up at Salesforce last quarter were its GAAP profits. At $0.15 per share, those actually slipped 6%. But not to worry -- the kind of profits that really count, the free cash flow, were there in abundance.
Doubling its operating cashflow year over year, Salesforce brought $53.9 million more cash through the door in Q3, which was more than twice reported "profits" under GAAP. Year-to-date, the company's generated a whopping $233 million worth of free cash flow, putting it on track to end the year near $310 million.
So ... why am I still pessimistic about Salesforce's prospects? I mean, the company's met or exceeded expectations all year long. Its growth prospects seem sound, and this morning, investors rewarded the stock with a 16% price-bump. What's not to like?
Same thing as I didn't like last quarter: The price. You see, as fast as this stock's growing, its earnings are being hard-pressed to keep up. The valuation today looks closer to 56 times free cash flow. The P/E's in the triple digits.
Yet no matter how well Salesforce has done in the past, no company grows forever. Analysts are looking for 27% growth over the next five years -- about the pace sales are growing today, and faster than earnings are growing. That may be faster growth than rivals Microsoft
I don't know when. I don't know why, but sooner or later, Salesforce will hit a slump. And on the day the growth goes missing, you don't want to be holding this stock.
Google and Microsoft are Motley Fool Inside Value picks. salesforce.com and Google are Motley Fool Rule Breakers recommendations. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Google, Microsoft, and Oracle.
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