With shares of Salesforce.com (NYSE:CRM) trading at around $40.71, is CRM an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for the Stock's Movement
Customers love Salesforce, investors love customers, and Salesforce loves investors. While all this is accurate, it's not entirely fair. Truth be told, Salesforce also loves its customers. In fact, it's the closest a company can come to wining and dining its customers without actually doing so. The best part is that the feeling is mutual.
Customers who have been lucky or wise enough to use Salesforce have often stated that they would be lost without having done so. For example, the Sales Cloud offers many features, all of which are based on prioritization and speed. The average Sales Cloud customer has reported a 32 percent increase in productivity, a 32 percent increase in lead conversion, and a 29 percent increase in win rates.
Salesforce is the largest provider of CRM, and it created the SAAS CRM market. Most customers prefer paying monthly opposed to buying software because they can use the latest updates. One big plus for investors is that Salesforce will always push for package upgrades so the customer will receive more features. Many customers end up happy with their upgrade.
On Glassdoor.com, Salesforce has an employee rating of 3.8 out of 5, which is one of the highest ratings seen. An impressive 76 percent of employees would recommend the company to a friend. An even more impressive 93 percent of employees approve of CEO Marc Benioff. That's what you call strong company culture!
A few negatives for Salesforce include weakening stock price momentum, weak margins, no dividend yield, a decline in earnings on an annual basis, and poor valuation.
The chart below compares fundamentals for Salesforce, SAP AG (NYSE:SAP), and Oracle Corporation (NASDAQ:ORCL). Salesforce has a market cap of $23.84 billion, SAP has a market cap of $93.03 billion, and Oracle has a market cap of $152.43 billion.
| CRM | SAP | ORCL | |
| Trailing P/E | N/A | 24.78 | 15.06 |
| Forward P/E | 64.62 | 19.79 | 11.08 |
| Profit Margin | -8.87% | 17.60% | 28.46% |
| ROE | -13.85% | 20.71% | 24.29% |
| Operating Cash Flow | $736.90 Million | $5.07 Billion | $13.72 Billion |
| Dividend Yield | N/A | 0.90 | 0.70% |
| Short Position | 2.90% | N/A | 1.10% |
Let's take a look at some more important numbers prior to forming an opinion on this stock.
E = Equity to Debt Ratio Is Normal
The debt-to-equity ratio for Salesforce is close to the industry average of 0.30. Debt management has been good.
| Debt-To-Equity | Cash | Long-Term Debt | |
| CRM | 0.28 | $867.62 Million | $647.94 Million |
| SAP | 0.30 | $6.15 Billion | $5.83 Billion |
| ORCL | 0.45 | $33.41 Billion | $19.75 Billion |
T = Technicals Have Weakened
Salesforce has performed well over the past three years, but that momentum has come to a halt. It has been a difficult year so far for the industry.
| 1 Month | Year-To-Date | 1 Year | 3 Year | |
| CRM | -7.41% | -3.13% | 3.94% | 89.77% |
| SAP | -1.52% | -2.99% | 19.00% | 66.66% |
| ORCL | 1.28% | -2.88% | 11.74% | 27.71% |
At $40.71, Salesforce is trading below its 50-day and 100-day SMA, but still above its 200-day SMA.
| 50-Day SMA | 43.06 |
| 100-Day SMA | 42.64 |
| 200-Day SMA | 39.48 |
E = Earnings Have Been Weak
This is a major negative. In an era when the majority of companies throughout the broader market have shown a consistent increase in earnings from 2010 to 2012, Salesforce has headed in the opposite direction. On the other hand, while many companies throughout the broader market have suffered a revenue decline in 2012, Salesforce has continued to move forward without skipping a beat.
| 2008 | 2009 | 2010 | 2011 | 2012 | |
| Revenue ($)in billions | 1.08 | 1.31 | 1.66 | 2.27 | 3.05 |
| Diluted EPS ($) | 0.09 | 0.16 | 0.12 | -0.02 | -0.48 |
When we look at the previous quarter on a year-over-year basis, we see a significant increase in revenue and a slight decline in earnings.
| 1/2012 | 4/2012 | 7/2012 | 10/2012 | 1/2013 | |
| Revenue ($)in millions | 631.91 | 695.47 | 731.65 | 788.40 | 834.68 |
| Diluted EPS ($) | -0.01 | -0.04 | -0.02 | -0.39 | -0.04 |
Now let's take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?
T = Trends Might Support the Industry
The industry has seen a slowdown of late, which isn't a good sign as it indicates a slowdown in spending. However, the three companies mentioned in this article are well positioned to benefit from future technological trends.
Conclusion
Salesforce is a strong company with a great company culture, impressive growth, and good debt management. On the other hand, margins and cash flow are subpar.
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