As for me… well personally, I still think Deutsche was right the first time around — and that ExactTarget Inc (NYSE:ET) was overvalued then, and even more overvalued at a price within pennies of what Salesforce has agreed to pay for it. While I agree that the buyout is likely to happen, I don’t see any reason to hold onto the stock any longer. My advice would be more along the lines of: Go ahead and sell today. Take the money and run.
…and for Salesforce as well?
Given that this is my opinion of ExactTarget Inc (NYSE:ET), you can probably guess my opinion of the company that’s buying it, too. Simply put, I think salesforce.com, inc. (NYSE:CRM) is a great business, but a bad stock to own — and not only because of this purchase.
Of the three big database software firms, Salesforce currently sports the worst record for cash production, having generated only $622 million in real free cash flow over the past year. This gives Salesforce a current price-to-free-cash-flow ratio of 36, and while that’s better than its current P/E ratio of infinity (because you can’t easily divide negative earnings into a positive stock price), it’s also a number likely to worsen as a result of the ExactTarget Inc (NYSE:ET) acquisition. That’s because ExactTarget is currently free cash flow-negative — and has been so every year but one over the past 10 years.
That being said, my opinion clearly isn’t a popular one. Most notably, Goldman Sachs itself announced it was upgrading Salesforce today, adding the stock to its “conviction buy” list, and arguing that far from being overvalued, the stock’s likely to rise as much as 59% in value over the course of the next year!
Quoted on StreetInsider.com today, Goldman explains that “CRM had 12% share of the $20bn total customer relationship management market in CY12.” Goldman thinks that market share “will grow to 22% of the total $26.5bn market in CY16 (including sales, service and marketing pre-ET).” (So nearly twice the share of a bigger market.) Goldman further projects that salesforce will maintain its 12% share of the smaller, but faster-growing $3.5bn Platform-as-a-Service market, growing revenues there as well.
Combined, that’s about $4.4 billion in revenue growth, on top of the $3.2 billion in business Salesforce already does — and Goldman thinks salesforce.com, inc. (NYSE:CRM) will capture this growth over just the next three years. That adds up to a $60 share price, says the analyst.
Me, I won’t quibble about the revenue expectations — but until salesforce.com, inc. (NYSE:CRM) proves it can turn more of this revenue into real cash profits, instead of frittering it away buying overpriced, cash-burning subsidiaries, I’m not going to be a buyer, myself.
Motley Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Salesforce.
The article Wednesday’s Top Upgrades (and Downgrades) originally appeared on Fool.com.
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