salesforce.com, inc. (CRM): Why This Stock Is Overvalued

This means the current price of the company is almost 200 times more than future earnings. This sounds scary, but sometimes such things do hold for a certain period of time. Such high forward P/E rates mean that investors anticipate extremely big growth. NetSuite boasts that its CRM is the only one that provides full 360 degree customer experience, from lead and opportunity through to sales order management, upsell, renewals, and service. NetSuite is also focused on growth, and would have to follow the same path as salesforce.com, inc. (NYSE:CRM). It would have to expand its products to grow its customer base, so I expect these companies to actively compete with each other.

A well-known player in the field is SAP AG (ADR) (NYSE:SAP). SAP AG (ADR) (NYSE:SAP) provides ERP, CRM, financial management, human capital management, and other various business solutions. SAP is known for the complexity of its products. SAP is an established profitable company. It trades with a trailing P/E of 24.11 and a forward P/E of 19.31. Its stock is down 5% year-to-date. The fact that SAP is an established company hurts the stock.

Investors cannot anticipate gigantic growth to justify sky-high multiples. SAP AG (ADR) (NYSE:SAP) is facing tough competition from both Salesforce.com and NetSuite. SAP realizes that the days of domination are over. There are new companies that want to get a piece of the pie. In fact, SAP speaks the same language as NetSuite when describing its CRM platform. It says the platform provides a 360 degree view of customers, so it is called “SAP 360 Customer.” SAP has an advantage over smaller companies, because it can sell its solutions to an established customer base. All in all, SAP is a very dangerous competitor for Salesforce.com.

Bottom line

I believe that Salesforce.com is an overpriced stock. Company’s expenses are growing at a faster pace than its revenue. The stock trades at a ridiculously high forward P/E of 68.65. This means that big growth is anticipated by investors. When the company would not report such growth, the stock would be severely punished. salesforce.com, inc. (NYSE:CRM) presents big risks for investors. Given the current situation in the sector, Salesforce.com could present opportunities for a speculative trade, but not for long-term investment.

The article Why This Stock Is Overvalued originally appeared on Fool.com and is written by Vladimir Zernov.

Vladimir Zernov has no position in any stocks mentioned. The Motley Fool recommends Netsuite and Salesforce.com. Vladimir is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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