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Foolish Forecast: Salesforce.com Calling

By Rich Smith – Updated Nov 15, 2016 at 5:56PM

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Views you can use to get clues on tomorrow's news.

Daytraders, start your engines. One of the most overpriced companies on the market is set to report earnings. Hours of action-packed after-market pumping and dumping will surely ensue. Yes, it's earnings day at software-on-demand provider Salesforce.com (NYSE:CRM). The company reports Q4 and full-year 2005 earnings tomorrow after the close.

Wall Street Wisdom:

  • General consensus. A whopping 25 analysts track the fortunes of this rule-breaking company, whose business model aims to make those of Oracle (NASDAQ:ORCL) and Microsoft (NASDAQ:MSFT) obsolete. Ten analysts rate Salesforce.com a buy, three more a sell, and the rest say: "A P/E of 150 looks perfectly reasonable to us. Just hold it and trust that everything will work out fine."
  • Revenues. Here's one reason Salesforce.com has 10 analyst-fans: Revenues are believed to have increased 68% year over year in the fourth quarter, to $91.7 million.
  • Earnings. Here's another: Profits per share are expected to rise 67%. The three bears will point out that even if Salesforce.com hits estimates, it will only earn a nickel a share (to which the bulls will rejoinder, yeah, but in the six quarters since it went public, the company beat estimates four times).

Margin watch:
In reviewing the company's rolling margins, feel free to disregard last quarter's result, which was inflated by a one-time tax credit. Also, remember that Salesforce.com's net margins usually exceed its operating margins because 1) the company isn't yet earning much from its operations, and 2) it has a lot of cash and collects a lot of interest income relative to its operating profits.

Margins %

7/04

10/04

1/05

4/05

7/05

10/05

Gross

81.2

81

81

81

80.1

78.9

Op.

1.3

2.3

3.7

4.9

5.6

6.5

Net

3.5

2

4.2

5.5

6.4

9.5

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Foolish forensics:
Salesforce.com doesn't shine on its income statement, where its net margins pale in comparison to those of competitors like Microsoft, Oracle, and SAP (NYSE:SAP). Rather, Salesforce.com really sparkles on its cash flow statement. There you see that while GAAP only let the firm report $26.1 million in profits over the past 12 months, its cash profitability (free cash flow) was more than twice that, at $57.5 million.

Valuation metrics:
With its resulting price-to-free cash flow ratio of 65, Salesforce.com won't be cheap even if it achieves the 45% long-term compounded earnings growth that analysts project for it. But still, it is cheaper than its GAAP profits would otherwise make it appear.

Microsoft is a Motley Fool Inside Value pick. Take the newsletter service dedicated to great stocks on the sales rack a 30-day free spin.

Fool contributor Rich Smith does not own shares of any company named above.

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Stocks Mentioned

Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$237.92 (-1.27%) $-3.06
Salesforce, Inc. Stock Quote
Salesforce, Inc.
CRM
$147.01 (-2.09%) $-3.14
Oracle Corporation Stock Quote
Oracle Corporation
ORCL
$64.55 (-2.24%) $-1.48
SAP Stock Quote
SAP
SAP
$79.47 (-2.33%) $-1.90

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

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