This company recently reported its first-quarter results. salesforce.com, inc. (NYSE:CRM) reported a first quarter GAAP net loss of $0.12 per share. Non-GAAP diluted earnings per share were $0.10, in line with analyst expectations. Investors took the report coldly, and the stock fell 5.34% on the day of the report. This year, Salesforce.com stock is almost flat while the S&P 500 is up more than 15%. Companies that provide cloud-based solutions gain a lot of attention nowadays. Let’s see if salesforce.com, inc. (NYSE:CRM) is worth your attention.
The peculiarity of the report
You might have noticed the big difference between GAAP and non-GAAP results. In its earnings report, the company states that non-GAAP results exclude the effects of $115 million in stock-based compensation expense, $24 million in amortization of purchased intangibles, and $9 million in net non-cash interest expense related to the company’s convertible senior notes. What’s more important for the investor? As you can see, stock-based compensation makes a difference between a profit and a loss.
In my opinion, GAAP is right to treat it like an expense. I do not think it is good for shareholders when the stock compensation brings a company to a loss. Management is supposed to generate positive returns for shareholders, right? In the real world, it is not unusual for management to get huge benefits even when the company goes bust, but this topic is beyond the scope of this article. What is important is to distinguish between GAAP and non-GAAP results. salesforce.com, inc. (NYSE:CRM) wants you to see only the non-GAAP results, because they show profit. I advise you to look at the GAAP, which shows loss.
Telling the growth story
Salesforce.com’s report showed that revenue for the first quarter rose 28% from a year ago to $892 million. The company has raised its full fiscal 2014 revenue guidance. Salesforce.com projects to make around $3.85 billion in 2014. In the earnings call, the company stated that it is excited that Gartner, a well-known information technology research firm, announced that Salesforce is the largest CRM platform in the world. Revenue is very important for each company, and so are the expenses. Expenses rose 30.5% in comparison to the first quarter of 2012. They rose at a faster pace than revenue. In the previous quarter, expenses were 5% higher than revenue. This is not a good sign for me.
If salesforce.com, inc. (NYSE:CRM) manages to grow at its current pace, it would double its revenue in three years. However, as the company gets bigger, it gets increasingly difficult for it to grow at high rates. There are only so many customers in the world, and a good number of competitors are striving for their money. Growth sustainability is the number one issue for companies like Salesforce.com. When the stock is trading at a high valuation, investors are expecting the company to show big growth numbers. Salesforce is expanding its product offerings. Marketing cloud is the one that is well received by the customers. Salesforce needs to keep growing its customer base to achieve the growth that is expected from the company.
The competition
As the cloud gets hot, the competition is not sleeping. Let us look at other CRM providers to find out how they are doing. NetSuite Inc (NYSE:N), a company that provides both ERP and CRM systems, has enjoyed a healthy rise this year. Its stock is up 30% year-to-date. Just like Salesforce.com, NetSuite Inc (NYSE:N) was not profitable according to GAAP in the first quarter of 2013. The company is trading at a higher forward P/E than Salesforce.com. While salesforce.com, inc. (NYSE:CRM) has a 68.65 forward P/E, NetSuite Inc (NYSE:N) trades at a mind-blowing 198.52 forward P/E.
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.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
