Salesforce looks overpriced

Earnings concerns, a high valuation and increasing competition all suggest vulnerability.

By MSN Money Partner Jul 3, 2012 1:14PM
By Sheldon Liber

If you do not have questions about Salesforce.com (CRM), perhaps you should. I have many. I am also among the many cynical investors that have made CRM one of the most shorted stocks on the market.

Since the Internet market bubble of 12 years ago there have not been many companies like Salesforce.com that have enjoyed Wall Street acclaim despite rarely reporting anything resembling a net profit.  

Salesforce.com started in 1999 and went public in 2004. Marc Benioff, founder, chairman and CEO, is a world-class salesperson and fittingly leads a company that provides support for corporate sales teams.

However, try as I might to make sense of all the exuberance supporting CRM's sky-high stock price, I cannot. If you believe the analysts -- which historically has not been the best approach to investing -- then CRM will report earnings of $1.49 by January 2013, six months out. Based on Friday's close of $138.26, the price-to-earnings ratio will then be 92.79. Does that make any sense after 14 years?

If you do believe the analysts, then you should know the projection for January 2014 is $1.99, reducing the price-to-earnings ratio to a meager 69.48!

For comparison, look at three other high flyers. Few companies can match the growth of Intuitive Surgical (ISRG) or Apple (AAPL) over the last 10 years, or their projected growth over the next two years. Today ISRG has a price-to-earnings ratio of 42.30 and Apple stands at 14.43. The third high flyer is Chipotle Mexican Grill (CMG), with a price-to-earnings ratio of 52.63.

Salesforce.com may indeed start to improve its earnings picture and perhaps hit the analysts' numbers, but the competition is heating up. It is significant that IBM (IBM) recently decided to use an alternative sales program provided by a private company, SugarCRM. I think this is a test that will lead to an acquisition, and if it does, Salesforce.com will have to face down a giant. It may also have to prevent Oracle (ORCL), SAP AG (SAP) and Microsoft (MSFT) from making an end run. (Microsoft owns and publishes Top Stocks, an MSN Money site.) 

Given all the challenges facing CRM, can it hit analysts estimates? Do those estimates reflect the future competitive landscape and the erosion of pricing power? I would say no and no. However, even accepting these figures, I could still not foresee a price-to-earnings ratio 18 months from now that is 64% greater than ISRG, which is basically a monopoly.

So what is Salesforce.com worth? Optimistically, giving it a price-to-earnings ratio equal to Intuitive's and assuming it hits its January numbers, we are looking at a price of $63.03 -- 54% less than today. Since CRM is not a monopoly and competition is intensifying, I am not sure it is worth half that. I would say it's worth $100 less than the current price, or somewhere between $30 and $40. If IBM buys SurgarCRM it would be worth even less.

Will Marc Benioff lead Salesforce.com into the burgeoning world of cloud computing or is he just clouding investors Vision?

Sheldon D. Liber is the CEO/CIO of Chasing Value (TM) Asset Management, Inc., and General Partner of the Chasing Value Fund. You can follow him on Twitter: @chasingvalue
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