CRM - Salesforce.com

[fareastwarriors]

Maybe companies like their products but, as an employee, I hated it. Forgot the name of  product I used but it was crap. Thank goodness I don't have to work with it again.

 

I wish them well.

[Liberty]

So this used to be an almost consensus short a few years ago. At the time, I remember CRM being constantly mentioned all over the forum in multiple threads as an example of an overvalued company.

 

I was looking back through this thread to see what could be learned, and thought I'd bump it up in case anyone wanted to do the same or add something about it with the benefit of hindsight.

[Liberty]

https://www.forbes.com/sites/tomtaulli/2019/03/17/salesforce-com-20-secrets-to-its-125-billion-success/

[KCLarkin]

So this used to be an almost consensus short a few years ago. At the time, I remember CRM being constantly mentioned all over the forum in multiple threads as an example of an overvalued company.

 

I was looking back through this thread to see what could be learned, and thought I'd bump it up in case anyone wanted to do the same or add something about it with the benefit of hindsight.

 

Even with the benefit of hindsight, I don't think we have learned much with this one. The bull and bear cases remain exactly the same. I don't think you can resolve this debate until the growth slows down. Presumably, it will become a cash cow and justify the current valuation. On P/S, it doesn't look too overpriced to me.

 

Still not seeing great FCF conversion. It is printing stock like crazy (which is major source of FCF). Bulls will argue that GAAP earnings don't reflect owner earnings because of growth investments and customer acquisition costs. Bulls are correct here, but I am still surprised that this thing isn't already gushing cash. Yes, they are investing for growth but they also collect up front. I'm guessing they just don't have good cost discipline.

 

It has sustained high growth longer than I expected. But it is still pretty small, so could keep going for a long time.

[Vish_ram]

So this used to be an almost consensus short a few years ago. At the time, I remember CRM being constantly mentioned all over the forum in multiple threads as an example of an overvalued company.

 

I was looking back through this thread to see what could be learned, and thought I'd bump it up in case anyone wanted to do the same or add something about it with the benefit of hindsight.

 

I hope you did read some of my comments where I cautioned the shorts. The lesson is, high growth companies that aren't burning cash and leading the industry will trade at higher valuations in bull market and high in bear markets. The so called value investors cannot comprehend the "g" portion of the value equation. Folks will happily buy a dying company when it trades in single digit P/E with book value that will prove to be nothing.

 

I learnt my lesson and bought AMZN at 600. I should have bought it at 25, but overstayed in value camp.

 

My lesson is, avoid cash burning growing company that needs huge capex, capital outlay, offering commodities etc.

 

[Liberty]

I think another lesson is that many value investors didn't have the tools to evaluate the value of a SaaS company where there are high upfront customer acquisition costs but the recurring lifetime value of customers is positive for each cohort (but new cohorts hide current profitability, since as much as possible is re-invested in growth).

[Vish_ram]

I think another lesson is that many value investors didn't have the tools to evaluate the value of a SaaS company where there are high upfront customer acquisition costs but the recurring lifetime value of customers is positive for each cohort (but new cohorts hide current profitability, since as much as possible is re-invested in growth).

 

It is not just SaaS. It is having the right framework to understand sticky biz with growth attached. The biz also has the potential to expand the product offerings, add-ons that kind of expand the empire. It is like they sell you a hand kerchief and soon start selling pants, shirts, socks etc. I once worked for Oracle, they first sold database, then Oracle GL, AR, AP etc , slowly moved to manufacturing, CRM etc. I used to watch Oracle trading at 40 times cash flow, but growing very fast. I always used to wonder how can one justify owning Oracle. In the years it returned many times over.

 

The thing to watch for is if we are in a massive bubble (Nasdaq in 2000 was once in a lifetime tech bubble. Remember cisco was trading at 100 times sales).

 

Last few years, I have bought small positions in many SaaS/software and have done well (AYX, SLP, ZUO, PLAN, NEWR, TWOU...)

 

Another approach is to own XSW (or other tech etf's) and just forget about it.

 

A simple thumb rule is, Never short growth stocks. There are easier ways to lose money without heartache.

 

I can understand having trouble projecting growth. I made the mistake of thinking ULTA can never keep growing, but look at the last 10 year inc statement. Who could have imagined that??

 

[SHDL]

I have no opinion on this company, but a general observation is that if you look at the history of successful growth companies in their early days, like say Walmart in 1975, one thing that really stands out is that you could have paid comically high multiples of their TTM EPS to buy their stock and still done very well over the following decades.  The flip side is that if you shorted the stock of such a company just because the multiples look a bit high you would have done rather poorly.

 

So I think Vish_ram’s rule of thumb above is a good one. 

[fuzzhead1506]

I have been a long time lurker of the forum here at COBF and for the most part I have been content to just watch the discussions instead of participate, but in the last few months there have been some posts that inspired me to spend the $20 for a membership.

It is interesting to me that consensus among the 2010 COBF crowd was long SHLD and short CRM.  I realize these are different industries and different customers but plugging some numbers into a lifetime value calculator could've put the members of this forum not just into a neutral position on these two stocks but have gone the opposite way.  Several of the Tiger Cubs of Julian Robertson were in fact just so - long CRM and short SHLD for the last decade.

 

Something that often reveals a lack of effort in thinking - or rather merely surface level cursory research - is when I talk with other investors and they say that a stock is cheap because of P/B or EV/EBIT but haven't thought through how a company will continue to keep the customers it has or grow the number of customers or make the customers spend additional dollars.  I don't think that I can say for sure that I am any better of a thinker in this respect than the next guy but maybe I can be the resident GARP guy.  I often remind friends or strangers that WB was able to think through the story when he made his investment with KO - it didn't just have a good valuation in the late 80's; he was able to say with pretty good confidence that Coke would be able to grow it's customer base, maintain the customers it already had, squeeze more profits out of those customers and that is pretty much exactly what it did.  Today nearly every person in the 1st world and emerging markets has a Coke product at least a few times a year and Coke products are more profitable than they were in the 80's.  This is what has made the investment a home run - not that it was cheap on a P/B ratio.  Conversely, WB stayed out of the SHLD trainwreck of the last decade by merely saying retail is a tough business. 

 

I would argue that CRM has been a story that has been much more difficult to wrap your head around primarily because it started from such a low number of customers.  When people use Salesforce.com however, they are more productive and this creates a flywheel effect where they get to spend more money with the platform and Salesforce can then grow the number of people that use the software. 

 

If there is a lesson to be learned, I think it should be that investors shouldn't stop at "the company should get a revaluation" in their research.  Think through why a company deserves a certain valuation as well.  Banks often trade at some multiple of book value close to 1 because the return on equity numbers discounted back by the 7-10% that most investors use gets you to that number.  Companies like FB and PG and BKNG and MA get higher valuations on their earnings than GM or FCAU because they are able to continue producing very high ROIC and should do so for the foreseeable future... 

 

Anyway - just some thoughts I had as I read Liberty's post regarding lessons learned.

[Liberty]

Welcome to the forum, fuzzhead. Excellent first post!

[KCLarkin]

I thought of CRM when I read this:

https://www.advisorperspectives.com/commentaries/2018/03/15/why-financial-statements-dont-work-for-highly-innovative-companies

 

earnings explains only 2.4% of variation in stock returns for a 21st century company

 

Edit to add:

When a company consistently screens as "expensive" (say trading consistently above 30x for five years), I'm always skeptical that it is "overvalued". I don't have an opinion on CRM, but there are plenty of recent examples of companies trading at 40x or 50x earnings that were actually very cheap.

 

[Gregmal]

I thought of CRM when I read this:

https://www.advisorperspectives.com/commentaries/2018/03/15/why-financial-statements-dont-work-for-highly-innovative-companies

 

earnings explains only 2.4% of variation in stock returns for a 21st century company

 

Edit to add:

When a company consistently screens as "expensive" (say trading consistently above 30x for five years), I'm always skeptical that it is "overvalued". I don't have an opinion on CRM, but there are plenty of recent examples of companies trading at 40x or 50x earnings that were actually very cheap.

 

I agree 100% and utilize the same reasoning with companies that escape my analytical skills. Short term, sure, things can go anywhere. But when something is what it is for a half decade or longer, the odds are that this is what it is.

 

I used to make this mistake, but ridding myself of it helped my ability to pivot into new ideas that otherwise I'd miss. Chances are, if I thought something was overvalued for 5+ years but it consistently trades at that valuation, I am the one who is wrong. The sooner you can come to terms with that the sooner you can re examine your investment thesis. Look at the VIC Wingstop thread. The best thing you can do for your portfolio is to figure out when you are wrong as soon as possible. Not make excuses to continue being wrong.

[Spekulatius]

I thought of CRM when I read this:

https://www.advisorperspectives.com/commentaries/2018/03/15/why-financial-statements-dont-work-for-highly-innovative-companies

 

earnings explains only 2.4% of variation in stock returns for a 21st century company

 

Edit to add:

When a company consistently screens as "expensive" (say trading consistently above 30x for five years), I'm always skeptical that it is "overvalued". I don't have an opinion on CRM, but there are plenty of recent examples of companies trading at 40x or 50x earnings that were actually very cheap.

 

Aren't the CRM companies in the end valued using accrual accounting and using non- GAAP and difficult to verify metrics like customer lifetime value. I think these metrics could become severely challenged when the cost of money goes up (in a recession etc).  when people start to use much higher discount rates. I am not sure I buy into this business model of cashless and profitless prosperity of AMZN, Uber, Lyft and other unicorn yet, but I wouldn’t bet on their demise either.

 

The “too hard pile” just gets bigger and bigger nowadays....

[KCLarkin]

I am not sure I buy into this business model of cashless and profitless prosperity of AMZN, Uber, Lyft and other unicorn yet, but I wouldn’t bet on their demise either.

 

CRM is still in my "too hard pile" but the obvious question is: why is this company spending 45% of revenue on sales & marketing. If this company could maintain current revenue while spending "only" 25% on sales, then it's maybe trading at 50x normalized earnings. Still seems expensive to me, but not irrational given the growth rate.

[SHDL]

I thought of CRM when I read this:

https://www.advisorperspectives.com/commentaries/2018/03/15/why-financial-statements-dont-work-for-highly-innovative-companies

 

That’s another central issue.  Personally, the sign I watch out for is when a company somehow keeps growing its revenues very quickly year after year without raising any capital and reporting little/no profits.  I take that as a good indication that the company is actually making more money than what the financial statements say and that it is re-investing those (invisible) “profits” through the income statement. 

[Liberty]

Buying Slack:

 

https://www.cnbc.com/2020/12/01/salesforce-buys-slack-for-27point7-billion-in-cloud-companys-largest-deal.html