On Monday’s Mad Money, Cramer interviewed the CEO of Salesforce.com (CRM). In his introduction to the interview, Cramer attempted to explain what it is that Salesforce actually does. The world of cloud computing and Software as a Service (SAAS) applications is still very new to many investors. At Ockham, we recently moved our critical IT infrastructure to “the cloud” and are amazed by the potential and scalability of such a business. The opinion around our office is that these sort of solutions are undoubtedly the way of the future. Cramer did a pretty good job of explaining why he things Salesforce is an exciting opportunity.
“…For lack of a better word, they are simply bankable. Guys who have made us a lot of money in the past, who we’d be fools not to pay attention to when it comes to the future. Mark Benioff, CEO of Salesforce.com, CRM for all you home gamers, is perhaps the most bankable CEO I ever have on the show. Salesforce, which pioneered the software as a service business, where companies subscribe to get their enterprise software over the Internet, the new model’s a turbo-charged tech stock that still, I believe, has plenty of juice.
The last time we interviewed Mark was on August 20th, after Salesforce.com had reported a truly blowout guide-up quarter. The stock was at $46.18. It’s up 22% since then. That’s what bankable means. I call that an incredible run. Especially when you consider a lot of tech stocks ran out of octane during that period. And I think Salesforce has a terrific future ahead. I think we’re in early thanks to some of its new the company started a new platform called force.com that helps its business customers take advantage of cloud. Stay tuned, you’ll find out what that really means. It’s a huge new market that and delivery of applications that run completely on the Internet, through outsourced network equipment. This saves customers time, saves them money. The platform gets applications delivered to their users faster. And where’s the money made? Salesforce customers don’t have expensive servers of their own. This new force.com platform will also be designed to work on all other cloud computing servers — providers like Amazon, Google, allowing the company’s customers to build their own business applications trust me, this saves a fortune.
They’re using only software delivered over the Internet. Basically, if you’re a business that wants to design an application that works on Google’s cloud computing network, you subscribe to Salesforce.com’s platform and they give you all the tools you need.
Salesforce.com also making a push into customer service. The CEO sees it as a billion-dollar opportunity by 2013. He’s being conservative. It’s possible 3/4 of all customer service applications could be based on software as a the company just announced a blockbuster deal with Cisco, this is the first thing I saw this morning when I woke up. It’s worth more than $1.91. That’s what the stock jumped I think Salesforce.com is in a [inaudible] but I have struggled on many occasions to show you at home what Salesforce.com really does besides make a lot of money. You know, I believe it’s important to know what you own. And in case, what this company does sounds too complicated or technical for you, tonight we’ve got a great chance to see some of the services Salesforce.com offers in action with the company’s fabulous, incredibly bankable CEO.” — CNBC’s Mad Money 10/5/2009
As you can tell from Cramer’s speech, he is excited about the market leading position that Salesforce.com occupies in this new and rapidly expanding business. The company has reported some excellent results even during the recession because in many cases they enable other businesses to save money. From a fundamental valuation standpoint, we believe that this stock still has great potential for appreciation.
There is no doubt that CRM receives a premium for their growth potential as you can tell by a simple forward looking (to fiscal 2010 ending January) P/E multiple of about 92x. However, analysts are expecting earnings growth of 33% during fiscal 2011, and high doubt digit revenue growth over that period. So, the analysts are expecting big things from this company in the future. When we take a look into the past, you will notice that CRM has historically sold for 44.9x to 93x cash earnings, but in terms of cash CRM is selling about 10% below the low end of that valuation metric. The same is true for price to sales, as this company has normally pulled a premium of 6.1x to 14.4x sales per share from the market. The current price-to-sales is only 5.7x.
The impressive performance of Salesforce.com in the last few quarters suggests that the company is continuing to grow very impressively, and we think that this growth is sustainable because of their revolutionary service. We are reiterating our Undervalued rating at this time. There will be competition from the other Internet powerhouses in the years to come, but we think that Salesforce is doing the right things to grab a healthy slice of the pie. We agree with Cramer that this stock has further upside, and we would recommend buying these shares anywhere below the low $70’s.
