Salesforce.com's Stock is Quite Sensitive to R&D Spend

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Salesforce.com ( CRM ) is a fast growing player in the cloud computing market that offers products such as cloud-based customer relationship management ( CRM ) software, Force.com, AppExchange and Database.com. The cloud-computing market is a fast growth area in which Salesforce.com competes with Oracle ( ORCL ), SAP ( SAP ), Google ( GOOG ), Microsoft ( MSFT ) and Amazon (AMZN).

Below we take a look at Salesforce.com's historical spend on research and development (R&D), and consider how the outlook for this number could swing our $128 price estimate for Salesforce.com stock . Our price estimate is in-line with market price.

Salesforce.com Continues to Innovate

In addition to cloud-based CRM software, Salesforce.com has introduced quite a few innovative cloud-based products to the market in the last few years:

  1. Force.com , a development platform for corporate IT departments and independent developers that allows them to build business applications.
  2. AppExchange , an online directory that provides customers a way to browse, test-drive, share and install applications developed on the Force.com platform.
  3. Chatter , an application that provides a social network as well as real-time connection features for enterprises.
  4. Database.com , a cloud-based database software product, which competes with similar offerings from Oracle.

These innovative products are a result of heightened R&D levels from Salesforce.com over the past few years. R&D spend as a percentage of gross profits has increased from around 9% in 2006 to roughly 11% in 2010.

See our full analysis and $128 price estimate for Salesforce.com

What Shape Could the R&D Spend Take?

Going forward, we expect Salesforce.com's R&D spend, relative to gross profits, to slow down a little. This is because, unlike traditional on-premise software where the vendor needs to maintain different software versions at many client sites, cloud-based products require only a single version to be maintained. This means that cloud players like Salesforce.com need to upgrade a single software release for all customers at the same time. This actually benefits Salesforce.com as the R&D cost incurred on maintaining different versions is mitigated. This factor will likely be the overwhelming driver that reduces R&D spend as a percentage of gross profits, an effect magnified by Salesforce.com's continued expansion of its customer base.

However, if R&D spend relative to gross profits continues to follow its historical growth trend, reaching about 15% by the end of our forecast period, it would imply 15% downside to our $128 price estimate for Salesforce.com stock .



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 , GOOG , MSFT , ORCL , SAP

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