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Investment manager on CRM was all Wrong on his call in June.

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October 12, 2010 – Comments (1) | RELATED TICKERS: CRM

Global CIO: Will Salesforce.com's Soaring Stock Puncture The Cloud?
An investment manager lists 15 reasons--15!--to avoid Salesforce.com's stock. Could that sentiment spread to product purchases as well? By Bob Evans
InformationWeek
June 15, 2010 08:00 AM
We're certainly not in the stock-touting business here at Global CIO but since investment analysts can have keen insights into the performance and potential of IT vendors, we pay attention to research reflecting business prospects and market dynamics versus deep financial analysis focused on stock prices.

So when one apparently rational investment manager recently posed 15 reasons for staying away from Salesforce.com's stock, I thought it merited a look to see if his issues were centered on the company's business fundamentals or on technical parsing of its share price.

And let me emphasize here that the investment manager's warnings were limited exclusively to Salesforce.com's stock, not its products. But since the two are certainly not totally disconnected, some of the concerns he cited merit a look.

Investment manager Bret Jensen issued his 15 reasons in two separate lists on SeekingAlpha.com, one published on June 4 and the second published on June 14. You can read the full lists at those links, but this column will confine itself to those warnings related to Salesforce.com's business issues rather than its stock-price valuation.

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Here are five concerns voiced by Jensen that I feel are relevant to the company's ongoing performance rather than the price of its shares (presented verbatim in the order in which they appeared on the two lists):

1) "Of the 291 insider transactions in the last six months, ALL were sells representing 12% of shares held by insiders. If insiders were selling starting in the 60’s earlier in the year, do you want to be buying in the 90's?"

2) "Price action and appreciation that is being driven by the Cloud Computing story seems eerily similar to the valuations achieved during the height of the internet boom of 1999."

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3) "SAP will be launching a competing product during this summer."

4) "Since the beginning of June, insiders have sold approximately 10mm in stock in roughly 20 separate transactions. This is in addition to their large sales since the first of the year."

5) "Consensus earnings for this quarter, next quarter, this fiscal year and next fiscal year have all come down in the last ninety days."

So what do we have here that could be of concern to CIOs? Let's take a look at each and see if there's any fire underneath the smoke:

Insider selling: This one's always tricky because unless you can take a multi-year view of the buying and selling done by insiders, narrow slices in time can reveal short-term aberrations that, over time, blend into the norm. But the stark trend revealing that all of the insider action involves Salesforce.com employees selling some shares can be unsettling. On the flip side, this can also be seen as validation of Jensen's overarching concern: that the company's success has pumped up its stock price to such a high valuation that you'd be nuts to buy at that or near these prices—so, assuming Salesforce's employees aren't nuts, they're taking this opportunity to cash out on some of their holdings. While I'd like to see Salesforce post some comparative long-term charts showing how this latest trend does or does not fit in with traditional patterns, I do not think this warning about the share price should be associated with the company's business prospects. VERDICT: Strange but not scary.

Is cloud computing all hype? While I've heard lots of folks express misgivings about the high level of froth in today's discussions about cloud computing, I have not heard anyone other than Jensen compare it to the monumental failures of the dot-com era. Is there too much rah-rah talk in some quarters about cloud computing's ability to fix every IT problem at no cost while also curing your bunions? Absolutely. Will there be a number of hanger-on IT vendors whose last-ditch grab for ongoing relevance will be to slap a "cloud computing" label on their otherwise lackluster products? Yes indeed. Does the cloud computing category—a sector epitomized by Salesforce.com as much as any other company—deserve the comparisons to the flawed and failed dot-com fever? No it doesn't—that's a crazy comparison and one that plays much more into emotion than it does into on-the-ground realities. VERDICT: Not guilty. 

 

Can Salesforce.com stave off SAP? This is a terrific point for Jensen to raise: will the full-fledged entry into cloud computing by the world's leader in enterprise applications spell trouble for Salesforce.com? While SAP will surely have some successes in the market, the company itself has said repeatedly that its on-premise versions will remain the favorite and dominant choice for SAP customers for many years to come. Plus, as SAP pushes its cloud-based CRM product toward small and mid-sized businesses, Salesforce.com is continuing to drive its products toward larger and larger enterprises, with deployments of 50,000 seats and more no longer out of the ordinary. Plus, for quite some time now, Salesforce has been slugging it out in the market with Oracle and Microsoft—not exactly lightweights when it comes to competition—so while SAP will certainly intensify the competition, its imminent arrival does certainly not necessarily spell trouble for Marc Benioff's company. VERDICT: Yes it can.

Should Salesforce.com's rising costs be a concern? Tying into the point above about Salesforce.com's deepening incursion into the enterprise market, the company has had to invest in new ways of marketing and selling to and then supporting huge global organizations, and those investments have whittled away at profits. Benioff has said on more than one occasion that the company needs to invest for future growth, and in addition to its expansions of its field capabilities, Salesforce has also been pouring more money into developing new products for its more-demanding global customers while reinforcing its technology infrastructure as well. VERDICT: No more than usual.

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Overall, I think Jensen's comments should be applied exclusively to the company's share price and not extrapolated to indicate a parallel imminent decline in the company's ability to meet and surpass customer expectations. Benioff & Co. have been doing exactly that for 10 years and appear to be well set to continue doing so well into the future. 

1 Comments – Post Your Own

#1) On October 12, 2010 at 12:18 PM, russiangambit (29.30) wrote:

The issue is that the stock is too expensive. And longer term they will face competition fro oracle and sap. The onlyreasons it hasn't happened is because crm occupies more of a middle-sized company niche, which is too low margin for like of oracle and sap.. CRM will never break into large corporations market. it is extermly competetive.

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