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:
-
Force.com
, a development platform for corporate IT departments and
independent developers that allows them to build business
applications.
-
AppExchange
, an online directory that provides customers a way to browse,
test-drive, share and install applications developed on the
Force.com platform.
-
Chatter
, an application that provides a social network as well as
real-time connection features for enterprises.
-
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
.