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.

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