Not exactly sure what is not to like about Salesforce.com’s (CRM) performance in the last quarter, but the stock is getting hammered down more than 7% in post market activity. Earnings per share doubled from a year ago to 16 cents, which equaled the consensus of the 30 Wall Street analysts that cover the stock. Record sales of $331 million increased 20% over a year ago and also surpassed Wall Street’s predictions of $324 million. Operating cash flow of $36 million rose 107% compared to a year ago. Furthermore, the company raised its guidance for earnings and revenue to slightly higher than the analysts’ view.
There is no doubt that the results appear strong, but perhaps the growth was not impressive enough to maintain such a lofty valuation. Coming into the day Salesforce was trading at a P/E or nearly 108x, and the forward looking P/E approached 80x. The PEG ratio for expected earnings growth over the next five years is nearing 3x, which is a stretch. Clearly, this
stock is trading based on its potential in the future rather than its ability to earn today.
We happen to think that the stock is Fairly Valued at the current levels, which means even by our value based methodology this stock is not so far out of line with fundamentals as to spark this sell-off, especially after a successful quarter. When you look at valuation multiples like price-to-sales for Salesforce.com, they are high but not compared to what the market has been willing to pay in the past. For example, CRM trades for about 6.9x revenue per share however historically the market has paid between 5.6x and 13.4x. Similarly, the current level of price-to-cash earnings of 49x while undoubtedly high is on the lower end of the historical range for CRM. So, while there are concerns over valuation in comparison to the market, at Ockham we think it often is more informative to compare the stock to itself in the past.
Remember we have the stock as Fairly Valued, and it would be extremely difficult for us to recommend buying a stock with a simple fiscal P/E over 100x. That being said, the stock continues to improve fundamentally and if it drops back into the mid-$50’s that may make it a candidate for upgrade.
We believe there is reason to believe that Salesforce.com warrants a significant growth premium in this burgeoning slice of the technology sector. The Customer Relationship Management industry continues its rapid growth, according to a recent report from Gartner it grew 12.5% in 2008, and Salesforce.com continues to grab an ever larger portion of the market. There was nothing in this quarterly release to make us believe that the growth is not still a compelling factor for this stock.
Source for chart: DestinationCRM.com
