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Excellent Short Case for Salesforce.com

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July 27, 2010 – Comments (4) | RELATED TICKERS: CRM

While some of the articles over at Seeking Alpha often leave a little to be desired, many of them are pretty good. Possibly the best feature that the company has been running lately is its "Just One Stock" series of articles.  In these pieces, someone at SA interviews a seasoned investment manager and asks them for their best stock idea at the moment.

Today's article in the series ties in nicely with the blog post that I wrote last week titled Cast your vote for the World's Most Overpriced Stock.  At the time, I nominated Opentable (OPEN) as my overvalued stock.  Another company that received a number of votes was Salesforce.com (CRM).

Here's a link to today's Just One Stock article:

Just One Stock: The Cloud Leader Due for a Return to Earth

In the article, Bret Jensen, chief investment strategist for a Miami hedge fund called Simplified Asset Management states his case for a short of CRM.

Here's what Jansen has to say about the company:

How is Salesforce.com positioned with regard to competitors?

The company is the undisputed market leader in the customer relationship management software space. However, given the growth of cloud computing and the 80% gross margins available in this space, it can count on deep-pocketed competitors - Oracle (ORCL), Microsoft (MSFT), SAP (SAP), etc. - offering compelling alternatives at some point in the future.

I am also not impressed with the product itself. I spent eight years as a technical director of software development at a Fortune 100 company. None of my contacts from my previous career that have deployed the main CRM software are impressed with its ease of use, technical architecture or overall performance. The most common feedback I have received on the software is that it is adequate, but a somewhat “clunky” tool. 

How does CRM's valuation compare to its competitors?

Probably the closest comparison in cloud computing is VMware (VMW), which I think is very overvalued itself but looks like an absolute steal when stacked up against CRM: 

And speaking of the CEO, does the company's management play a role in your selection?

Yes, management does play an important part of our evaluation. First, they are selling stock incessantly. CRM is consistently on Barron’s weekly top 20 companies with heavy insider selling. They also lost a key executive to Hewlett-Packard (HPQ) recently.

Finally, the CEO is famously prone to hyperbole in interviews and events. One recent interview spent quite a bit of time talking about his Zen-like management philosophy, swimming with dolphins and how he works one week a month out of his house in Hawaii. Personally, I like the CEOs for my long picks to be from the old school: nondescript, blunt and totally focused on running the business. 

I am opening a short position in CRM today in CAPS at $98.11/share, or around 162 times trailing and 66 times forward earnings.

Deej 

4 Comments – Post Your Own

#1) On July 27, 2010 at 11:40 AM, Griffin416 (99.98) wrote:

FSLR once has a 200 p/e. Then got cut in half. I would love to short CRM, but it needs to start breaking down technically first, i.e. going below its 50 moving average, which it basically has been holding for 18 months. Wall street hype can last longer than you can stay solvent.

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#2) On July 27, 2010 at 12:39 PM, chk999 (99.97) wrote:

Deej - I totally agree with you, which means it will go higher in the short run.

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#3) On July 27, 2010 at 12:57 PM, TMFDeej (99.42) wrote:

You're right about that, Griffin.  I can't tell you how many times I've considered shorting AMZN and NFLX in CAPS only to be scared off by Mr. Market.

Chk, HA, you're probably right :).

Deej 

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#4) On August 03, 2010 at 7:12 PM, jlanganki (< 20) wrote:

Well, P/E is 166, but price to cash-flow is more like 32 -- which is not all that crazy if the company can manage to grow the cash flow.  Of course, this is a very basic measurement.  I wouldn't short this stock, but I also wouldn't buy it.  They might be doing some bookkeeping deal like not recognizing revenue right away on big contracts to make it seem like their earnings are lower than they really are.

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