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Hawk’s Vision

Salesforce.com (CRM) is Not Rich on Valuation – Shorting It is Dangerous

Aug 18, 2012

Similar to the same types that like to say Amazon.com (AMZN) is rich on valuation, the same is said about Salesforce.com (CRM), and usually the same indicator is used to form this opinion, the P/E ratio.Salesforce.com (CRM) trades 74X forward earnings so it immediately is labeled as over-valued by those that are using very old methods of valuing companies, and often apply the wrong metrics.

I am a firm believer that every sector, or sometimes even industry should be valued on its own metrics because the basic inputs of earnings per share, revenues, margins and sales are often not indicative of the underlying health of a company.  Also, a P/E ratio is never appropriate for an accelerating growth company, and even worse if you are using trailing P/E’s, so please throw away the college textbooks and enter a new-age of valuing companies.

A long-term investor in a growth company at the early stages of a thematic trend has to use these metrics to stay disciplined with the long term valuation outlook.You see these industry-specific, or sometimes even firm-specific metrics often quoted, whether it be Google (GOOG) with paid clicks or various retailers with same store sales growth.  The most important part of an earnings report is often hidden deep within the numbers, and it is helpful to develop these industry-specific metrics to better value companies versus peers, which is much more important than valuing a company versus the entire market standard because we want “Apples to Apples” not “Apples to Oranges”.Getting back on track to Salesforce.com (CRM) we are looking at a Company with a market cap of just $20.3B, and a clear leader in cloud computing for the CRM market where cloud is only 25% of the market with revenues of $17B/year.

We are still fairly early in the transition to cloud and CRM is likely to see 25 to 30% growth for years to come.  CRM is set to make $3B in revenues in 2013, and based on market opportunities and the growth outlook we have a Company making $11B in revenues in 5 years.  So, that is for the longer term view, but looking even at current valuation shares are trading at a major discount to its historical average.Using FY13 numbers CRM’s 25X EV/FCF over Billings Growth multiple is at 0.86, which compares to its 3 year range of 0.8 to 1.3.  Looking at a peer like Red Hat (RHT) utilizing the same metric and it is at 1.4 (23X EV/FCF and 16% Billings Growth).In conclusion, for those that feel CRM is over-valued at $147.23/share I would argue it is not only under-valued for the long term opportunity, but also at one of its cheapest levels to own over the past 3 years.Furthermore, considering CRM is completely dominant in its market and making a lot of smart, strategic acquisitions, its $20.3B market cap does not put in out of the realm for a potential acquisition target.  Consider that Cisco (CSCO) has $45B in cash, Google (GOOG) has $34B, Oracle (ORCL) has $25B+, and Microsoft (MSFT) has $55B+ in cash I think that Large Cap Tech will be going on a spending spree and CRM is the best target to drive growth.

CRM reports earnings this week, and on any weakness down near $120 it is surely a buy, and more than likely a good buy at current levels before the report, at least for a partial position.And now for those that like a nice long term chart we can see CRM has formed an Inverse Head and Shoulders Pattern that is likely to serve as a continuation pattern, and a break above $165 measures to a $235 target within the next two years, or around a 60% gain.


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