Salesforce.com: head stuck in the clouds

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Julian Close 03/24/2014

Salesforce.com ( CRM ) has had a great run in recent years, riding enthusiasm for its cloud-centric customer relationship management product. Customer relationship management is also called CRM, which explains why the company trades under that ticker. Salesforce.com went public just under ten years ago in 2004 and is today ranked the most innovative company in America by Forbes Magazine, as well as being an S&P 500 component.

As one of the first companies to successfully move enterprise software off-site, Salesforce.com garnered a lot of attention. The company was also known to feud, for a time, with Oracle ( ORCL )-one of two dominant companies in the enterprise software business, along with SAP ( SAP ). Due to semi-permanent consumer dislike of extant enterprise software solutions, Salesforce.com garnered a certain degree of public support, though the company evidently felt, in 2013, that the time had come to cash that support in, and it signed a nine year contract to use Oracle software to power its own applications.

Salesforce.com has been a revenue juggernaut since it went public, with revenue rising every year from 2005 to 2014, climbing from $176 million to $4.071 billion-an increase of more than 2,200 percent. That is an important consideration, but not the only one. Much of the new revenue has come from acquisitions, which the company has been making seemingly without regard to expense, and this has left the balance sheet a bit froggy. The company's debt ratio is 0.66; I'll accept that from a mining stock, but for a cloud computing company, it's too high. Rival EMC ( EMC ), for comparison, has a debt ratio of just over 0.5.

Salesforce.com has not been profitable since 2011, and analysts are forecasting net Earnings per share of just $0.04 in FY 2015 (the company's FY 2015 ends on January 31 of that year), which, at the current stock price of $57.17 gives the company an end of FY 2015 P/E ratio of 1,429. Once again, that's acceptable in certain companies at certain times, but Salesforce.com is a mature enough company that it should be focusing on making money. I can understand why they might prefer, instead, to try to buy their way into being a social media company-enterprise software is grueling business to be in-but in spite of that, I need to see this company make money on its core business before I'll believe that its downward slide is over.

Due to the extraordinary difficulties of operating in the enterprise software solutions market, the overhead of maintaining their server farms, the fact that they may have bought a world of trouble by using customer-hated Oracle software, the stocks overwhelming downward momentum and the lack of any clear plan for turning things around, the possibility of any significant, near-term rise in the price of CRM stock appears remote.


Chart courtesy of stockcharts.com

I seek to capitalize on this weakness with a bear-call credit spread. Look at the May 62.5/67.5 bear-call spread for at least a $0.78 credit. Use limit orders. This trade has a target return of 18.5% over 96 days, which is an annualized return of 124%, (for comparison purposes only). CRM stock has to rise 9.5% to cause a problem. Be aware that this is an aggressive trade, best undertaken by investors with diverse portfolios and high tolerance for risk.



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.

Originally published on InvestorsObserver.com


This article appears in: Investing , Options

Referenced Stocks: CRM , ORCL , SAP , EMC

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