How to Justify Salesforce.com's Stock at $150

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Salesforce.com ( CRM ) is 15% ahead of its Dec. 31st price of $132 at around $150 today based on optimism surrounding the launch of new products like Database.com and the continuing growth of Force.com and Chatter in the cloud computing market. This and new product announcements from competitors like Oracle ( ORCL ), SAP ( SAP ) and Microsoft ( MSFT ) that are focused on the cloud computing market have added to investor enthusiasm.

However, the stock is around 70% ahead of its 52-week lows and is 20% ahead of our $122 price estimate for Salesforce.com , and we believe is overextended for now. Below we take a look at our estimates and what factors could explain the difference between the market view and ours.

The newly launched cloud products such as Chatter, Database.com and Force.com haven't seen meaningful uptake thus far. The revenue from non-CRM products in 2010 was only 3% of the company's overall revenues while CRM accounted for the remainder. Our current forecasts call for Salesforce's market share in CRM software market and the non-CRM cloud computing (ex-CRM) to increase significantly to nearly 24% and 1% respectively in the coming years, which still leaves our valuation 20% short of the market. Furthermore, we expect the company's SG&A and R&D expenses as a % of revenues to decrease in the coming years.

However, below we look at what factors could impact our forecast and justify the current market price.

How to Justify a $155 Stock Price

1. Share in Customer Relationship Software Market

We expect Salesforce's share in the CRM market to rise to about 24% by the end of the forecasting period from just under 14% in 2010.

If the company can attract more customers to its CRM offering and increase its share of the CRM market to 28% instead of 24% as we estimated, there could be a 10% upside to our current Trefis price estimate of $122 .

2. Share in the Cloud Computing Market

We currently expect Salesforce's share of the non-CRM cloud computing market to rise to about 0.9% in 2017 from close to 0.07% in 2010. This segment of the cloud computing market consists of Software as a service (SaaS), Platform as a service (PaaS) and Infrastructure as a service (IaaS) and totaled around $68 billion in 2010. We expect this market to show healthy growth of around 25% on average over the Trefis forecast period to reach almost $325 billion by the end of our forecast period.

If Salesforce.com's market share in the global cloud computing market grows to 1.25% instead of 0.9% as we currently estimate, there could be a further upside of more than 10% to the Trefis price estimate.

3. SG&A Expenses

Salesforce.com's SG&A (selling, general and administrative) expenses have risen sharply in 2010. Our current Trefis price estimate is based on the expectation that Salesforce.com will be able to bring its SG&A expenses as a % of gross profit down from 71% to 64% in the coming years

If the company can cut back further on its SG&A expenses and bring them down to 62% of gross profit by 2017, it could mean a further upside of close to 5% to the current price estimate.

Taken together the above forecast modifications support a more bullish view of the company's growth prospects and could justify the current market price. To see other scenarios or make your own visit our site.

See our complete analysis for Salesforce.com



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: CRM , MSFT , ORCL , SAP

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