Salesforce.com, Inc. (CRM), ExactTarget Inc (ET) & Oracle Corporation (ORCL): Are There No Profits in the Cloud?

The “cloud” is as big a buzzword as the “internet” was 15 years ago. Remember how that ended. It seems like any company which has anything to do with the cloud is trading at outrageous valuations, profits be damned. When people start talking about the price/sales ratio as if its important, something is seriously wrong.

salesforce.com, inc. (NYSE:CRM) is a company which is growing revenue at an extremely quick pace. The company expects revenue to grow to around $4 billion this year, up from $3 billion in 2012. This new estimate comes as Salesforce announced the $2.5 billion acquisition of ExactTarget Inc (NYSE:ET).

Remember when profits mattered?

ExactTarget Inc (NYSE:ET) provides software-as-a-service solutions that allow companies to communicate with their customers through email, social media, and other channels. In 2012, ExactTarget Inc (NYSE:ET) recorded $292 million in revenue and a $21 million loss.

The most recent quarter saw sales increase of 39% year-over-year. But COGS increased 33% and operating expenses increased 51%, leading to a larger net loss. salesforce.com, inc. (NYSE:CRM) paid $2.5 billion for this?

It seems to me that Salesforce could have spent far less to develop offerings of its own. It wouldn’t be immediate like an acquisition, but it also wouldn’t be a giant waste of $2.5 billion. If ExactTarget Inc (NYSE:ET) manages to grow its revenue by 35% per year for the next five years, the acquisition price is still about twice 2017 revenue. And profits will likely be nil.

The problems with Salesforce

When salesforce.com, inc. (NYSE:CRM) announces earnings, they tend to emphasize non-GAAP numbers. In the most recent quarter, Salesforce announced adjusted EPS of $0.10, suggesting that the company turned a profit. But it didn’t.

These non-GAAP numbers don’t include stock-based compensation, which totaled a whopping $379 million in 2012 and $115 million in the first quarter of 2013 alone. That’s a $0.20 charge for the quarter and brings earnings back into the red.

Many companies give stock options to executives, but the scope of the practice is staggering at salesforce.com, inc. (NYSE:CRM). Since the end of 2008, the diluted float has increased 17% due to the subsequent dilution.

Investors apparently don’t care. The stock trades at 7.5 times sales and outfits like Goldman Sachs Group, Inc. (NYSE:GS) are touting the stock as a conviction buy.

Another problem is costs. While revenue increased 28% year-over-year, COGS rose 38% and operating costs rose 28%. This, of course, led to a bigger loss than during the same period last year.