CRM - Salesforce.com

[nkp007]

I can't be the only one who loves this company right? The cloud...leveraging social networking...synergies. It's definitely a worth triple what it's trading at!

 

Just kidding, I've been shorting it for months. I was introduced to the idea when I heard Whitney Tilson talking about it. Do a quick google search and you'll see the many cases against it.

 

http://video.cnbc.com/gallery/?video=3000053521

 

The main factors

-No GAAP earnings. Even with their "adjusted" earnings, CRM is trading at a ridiculous 100x multiple

 

-Insiders executing (and selling) their stock options years before expiry. Check out Todd Sullivan's twitter feed for the play by play.

 

-The CEO is sketchy.com. I have watched numerous presentations and truly have no idea what's going on. It is buzzwords galore. They talk about how the cloud is reinvigorating everything and how social networking changes everything.

 

But ultimately, I don't understand why their product is that unique and why Microsoft / whoever can't wipe the floor with them. http://www.youtube.com/watch?v=c4WbbCOHKBs&list=PL81C9FAB11DCA2FFE&index=1&feature=plcp

 

I could be dumb and just not get it.

 

-They bought some really nice land near San Francisco for a lot of money. They wanted to build a campus, but recently decided to freeze those plans because they were "growing too fast". In reality, I think it is because they're facing a cash crunch and don't want to stress the coffers

 

What do you guys think it's worth? I have no clue, but probably a lot less than where it is today. There are risks (someone acquiring them - if Instagram can sell for a billion...), but this thing smells in a few different ways. I decided to short it (significantly cheaper than the puts) with a cost basis ~$130

 

[oddballstocks]

I think the key is you really need to understand the product and the value proposition.  I'm not short or long, but have a good amount of professional exposure.  Companies we work with LOVE it, it's a very easy sell and changes businesses. 

 

As for growth a friend of mine works for a CRM practice at a major consulting firm, the practice didn't exist two years ago, they'll be doing over $100m this year I believe.  So yes, growth is there, clients love it, there is a big niche factor here.  CRM and MSFT products aren't really comparable, maybe at a summary level investment thesis they are, but at the client level I've never seen them pitched against each other it just doesn't make sense.

 

I don't know if 100x is overvalued or what, but there is some real world value here, as for an investment no idea.  I do know the product is completely changing the business landscape.  One key I've seen over and over is the buy decision is with a business person not an IT person, this is key.  A dept manager can buy CRM without any IT involvement, no servers, nothing.  Think of this as those pet projects built in Excel on steroids.

[nkp007]

I think the key is you really need to understand the product and the value proposition.  I'm not short or long, but have a good amount of professional exposure.  Companies we work with LOVE it, it's a very easy sell and changes businesses. 

 

As for growth a friend of mine works for a CRM practice at a major consulting firm, the practice didn't exist two years ago, they'll be doing over $100m this year I believe.  So yes, growth is there, clients love it, there is a big niche factor here.  CRM and MSFT products aren't really comparable, maybe at a summary level investment thesis they are, but at the client level I've never seen them pitched against each other it just doesn't make sense.

 

I don't know if 100x is overvalued or what, but there is some real world value here, as for an investment no idea.  I do know the product is completely changing the business landscape.  One key I've seen over and over is the buy decision is with a business person not an IT person, this is key.  A dept manager can buy CRM without any IT involvement, no servers, nothing.  Think of this as those pet projects built in Excel on steroids.

 

Very, very helpful. Thanks.

[keerthiprasad]

The clients are extremely loyal.  As far as I know, the switching costs are typically high (not an easy transition to a competitor).  In a previous job, we used salesforce even though there was a competitor offering a similar service 70% less.  The head of sales would have burned the company down before letting us buy anything else. 

 

But the valuation is definitely ridiculous and management sells a lot of shares...

 

Keerthi

[DCG]

I like the company, and like Marc Benioff (his book 'Behind the Cloud' is a very good read), but don't like the valuation.

[Eric50]

nkp007 - Is there a catalyst in the near term?

[nkp007]

nkp007 - Is there a catalyst in the near term?

 

My guess is that each earnings call is a potential catalyst given that expectations are so high. Any sign of less growth, less bookings growth, or heightened competition may spook analysts enough to the point where they make "adjustments" to their models.

 

If that's the case, who knows what happens next. If a model somehow values this thing at $160 or $180 as some do (on no GAAP earnings), I can only imagine what a small adjustment will do.

[ItsAValueTrap]

Ok I'm going to bump this thread.  The puts look cheap-ish here... implied volatility is in the low 40s.  (JOE puts are even cheaper, but that's another story.)

 

They are reporting GAAP losses, so this may no longer become one of those momo stocks that take several years to crumble.  On the other hand, they do have good cash flow because they pay out all that stock-based compensation.  They really know what they are doing.

[HJ]

And then there is the report that recently they've laid off quite a bit of people from Rdian 6 and Buddy Media, 2 acquisitions that they spent a combined almost $1 billion on.  It's the first sign of potential operational issue that I've seen coming out of the company.  But the stock trades in mysterious ways.

[Guest rimm_never_sleeps]

unless it's a fraud they aren't facing any kind of cash crunch. they produce free cash flow and have over $1b of net cash on the balance sheet. so if your thesis is they have a cash crunch I don't see it. having said that I believe it's overvalued as a business. But as long as we keep printing money I don't really see a catalyst. overvaluation can be it's own catalyst, however. For shorts I would look closely at the recent list of tech and "cloud" IPOs.

[HJ]

unless it's a fraud they aren't facing any kind of cash crunch. they produce free cash flow and have over $1b of net cash on the balance sheet. so if your thesis is they have a cash crunch I don't see it. having said that I believe it's overvalued as a business. But as long as we keep printing money I don't really see a catalyst. overvaluation can be it's own catalyst, however. For shorts I would look closely at the recent list of tech and "cloud" IPOs.

 

Half of that $1 billion is already out of the door to the former owners of Buddy Media.  Deal hasn't closed yet, and they are already talking about layoffs?  The short side of the story is never about them being a fraud or running into a cash crunch, but the sustainability and limit of their growth.  At 7x revenue, you are either looking for meaningful profitability coming into view with some growth, or 30% + top line growth as far as eyes can see.  If just defined within CRM applications, they may well be already bumping up against the limit.  Their market cap already exceeds what Oracle paid for Sieble and Peoplesoft combined by a factor of almost 2.  As for revenue potential, their current run rate at $3 billion annual compared with Sieble's run-rate of $1.3 billion and Peoplesoft's run-rate of $2.2 billion, the last year of both of their public market existence.  And new competitors like SugarCRM are coming on line.  It just takes those guys a while to gather momentum.  So how far can CRM alone take you?

 

In order to support essentially a VC multiple, but at $20 billion market cap, they talked about brand new space.  The Marketing Cloud, aka Radian 6 integrated with Buddy Media was going to be the next billion dollar business down the road.  With news of the lay off, and FB IPO flop, that road seem to be just a bit longer than they originally planned.  But they need the marketing cloud story to keep the hope of infinite revenue growth alive.  Of course none of this is to say they will collapse with in the next quarter or 2, but to me, the news of the lay off seem to be a bit more important than the market seem to give it credit for. 

 

I actually wouldn't necessarily short the recent crop of Cloud IPO's except maybe to play a bit of lock up expiration game.  It's one thing to use some imagination to support a $5 billion market cap, $20 billion is an experiment of an entirely different magnitude.

[RandFund]

Interesting discussion on CRM here.  I'll share some thoughts as a former insider.  I was quite surprised to hear about the layoffs because this goes against a very strong culture of high growth.  I'm referring to an internal headcount growth imperative, where we actually received cash bonuses for hitting recruiting targets.  My former colleagues are telling me that the layoff was due to overlap and duplication resulting from the acquisitions of Radian6 and Buddy.  That seems to be the accepted reason internally, and seems plausible to me, especially in context of the continuing hiring blitz.  (The main hiring focus is sales.)

 

It's also interesting to read musings here and on Seeking Alpha about insider selling and the prospect of suspicious accounting or outright fraud.  From my perspective, the share and option grants seem to be treated by most employee beneficiaries much like base pay or commissions.  Selling upon vesting is essentially automatic behaviour for many (if not most) employees from what I can tell.  Personally, I would caution about reading too much into this.  As for the company's honesty and accounting practices, my impression has always been and continues to be that the senior leadership (CEO and CFO in particular) are highly ethical and make sincere efforts to be transparent.  You can agree or disagree with their focus on non-GAAP earnings (I happen to disagree), but I believe they present the information factually.

 

While I think the company and its products are outstanding, I have tremendous difficulty with the valuation.  I am also wary of the high percentage of stock held by institutions and founders.  As a result, I am neither long nor short, and will wait on the sidelines as a spectator until one of two things happen:  GAAP earnings return and accelerate, or the shorts finally take hold and send the price down.  (It might be difficult to jump in, but we'll see.)

 

I think the fundamental question is:  can Salesforce.com flip a switch and rapidly become profitable enough to justify its current valuation and more?  And if you believe the answer is yes, how long can you wait until the company feels they have sufficient market share to cut their sales and marketing expenses and focus on the smaller task of renewing subscriptions rather than signing up new accounts?

 

I hope this helps some of you in your due diligence.

 

[nkp007]

Earnings come out soon. I doubt it'll be a surprise either way, but I'm still holding a large short position hoping that the valuation one day comes back in line with reasonable standards.

[Cardboard]

Well, I hope you are right man and that someday some sense of valuation will come back to some of these crazy stocks. I am short AMZN too and that piece of crap jumped the next day following a major earnings (well losses) and sales miss! Earnings matter eventually, they always do. And sales growth always slow down eventually. Just tough to say when.

 

Cardboard

[ShahKhezri]

I'm short both as well.  I've been involved in CMG, NFLX as well...I always covered after first drop.  These two will have their day too.

[Cardboard]

Tomorrow or in the next few days, you will see investment banks: "initiating" coverage of Salesforce.com as outperform with really high price targets. Always like that. It seems to me that no one with any clout should be initiating coverage anymore of a $20 billion market cap. It would be really like nice to do a study someday on these "initiations" to see who, why, when and how long the coverage was dropped? These new "supporters" sure excite people and the computers.

 

Anyway, listening to the call now. Benioff is the most annoying and arrogant CEO that I have ever heard. Painful...

 

Cardboard

[ItsAValueTrap]

There is probably an academic study that looks at analyst recommendations.  Basically... you should do the opposite.

 

The following is a really good book on why analysts make bad recommendations... usually it's to win investment banking business:

http://www.amazon.com/Confessions-Wall-Street-Analyst-Information/dp/0060747706

 

(If you want to help this site, purchase the book through this website's affiliate link.)

 

I'm not sure how much business Salesforce will generate for investment bankers though.

[Cardboard]

"I'm not sure how much business Salesforce will generate for investment bankers though."

 

10's of millions. Much more than the traditional underwriting fees for issuing new shares. It is all about writing expensive puts and calls that keep expiring worthless. There was some press on this about 2 years ago about some stocks closing exactly at the best prices on expiration to create the maximum pain for option buyers.

 

When you have a hyped stock where it becomes difficult for rational buyers (value, GARP) to assign a proper price that is when their game is at their best and where the analysts become very useful with their all aligned price targets and recommendations. It does not work forever. It stops when the company naturally shows sign of fatigue. However, I am sure that the temptation is too hard to resist and that many of them are very late to leave the musical chair game. Just like what we have seen with the housing bubble. Very few got out ahead of time since the fees kept pooring in and justifying big bonuses.

 

Cardboard

[nkp007]

I may be an idiot, but I have increased my short position significantly. Approximately 20% of my fund.

[Guest rimm_never_sleeps]

I may be an idiot, but I have increased my short position significantly. Approximately 20% of my fund.

 

can you update on the latest? thanks.

[nkp007]

I may be an idiot, but I have increased my short position significantly. Approximately 20% of my fund.

 

can you update on the latest? thanks.

 

Same as before, price is now much higher.

 

I think $CRM is a legitimate company that offers some great services, but I don't see them having a long-term competitive advantage as evidenced by their lack of pricing power. They have a low-teens attrition rate and their main basis for compensation / aquisitions (a high stock price) is tenuous.

 

There is a place for them in the cloud computing world, but not at their current market valuation. On a GAAP basis, they will be unprofitable for the foreseeable future.

[obtuse_investor]

I may be an idiot, but I have increased my short position significantly. Approximately 20% of my fund.

 

I lost a little bit of cash shorting CRM.

 

One thing I learned from a speech from Jim Chanos--- never ever short something purely because of valuation.

 

I realize that there are other issues with CRM's financial statements, but market has the ability to ignore these indefinitely.

 

 

[nkp007]

I may be an idiot, but I have increased my short position significantly. Approximately 20% of my fund.

 

I lost a little bit of cash shorting CRM.

 

One thing I learned from a speech from Jim Chanos--- never ever short something purely because of valuation.

 

I realize that there are other issues with CRM's financial statements, but market has the ability to ignore these indefinitely.

 

Good point.

[muscleman]

unless it's a fraud they aren't facing any kind of cash crunch. they produce free cash flow and have over $1b of net cash on the balance sheet. so if your thesis is they have a cash crunch I don't see it. having said that I believe it's overvalued as a business. But as long as we keep printing money I don't really see a catalyst. overvaluation can be it's own catalyst, however. For shorts I would look closely at the recent list of tech and "cloud" IPOs.

 

I haven't been tracking this since a year ago, but last time when I looked at it, the free cash flow come completely from liquidation of the inventory and account receivables from acquisitions

[HJ]

http://allthingsd.com/20121220/salesforce-may-go-shopping-in-response-to-oracle-deal/?reflink=ATD_yahoo_ticker

 

The way I see it, to short this stock, you almost have to get into the psyche of the current stock holders of CRM.  I think the only thing that'll make them sell is revenue deceleration, or liquidity issue which is not about to happen anytime soon unless they spend even more aggressively to buy more companies.  They did 50% revenue growth this fiscal year, and are forecasting 25-30% next year.  I think everything rests on this "marketing cloud", whether it will be able to reaccelerate their revenue growth or not, and we'll probably have better ideas of this by the middle of next year. 

 

None of this has anything to do with investing the way that's understood by most people, but you gotta play their game if you want to borrow their stock.