Sunday, January 23, 2011

Barron's: Shade of Dot Com Bubble (through the eyes of Salesforce.com)

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I wrote a piece a few years ago titled  [Jul 2, 2008: Does Valuation Matter?]   and I used Salesforce.com (CRM) as one of the 2 poster children, as it has been an interesting stock over the past decade.  Certainly a name I've always struggled with being a 'GARP' (growth at a reasonable price) kinda guy.  The stock has vacillated from "crazy expensive" to "really expensive" in my eyes over the years - just really impossible to value using any normal metrics.  Indeed there was a hilarious video made last fall called "I want My Salesforce.com" set to 'Money for Nothing'  [Sep 2, 2010: [Video] I Want my Salesforce.com]




This is definitely what I call the greater fool type of stock, when you jump in you are hoping a greater fool shows up to take it off your hand (hopefully one who was watching Mad Money).  And that is no disrespect to the underlying company which is excellent and transformative - it is all about a valuation no one can really defend.  (unless you are an analyst trying to win investment banking business)

Of course with the 'Bernanke Put' bringing back memories of the 'Greenspan Put' back in 1999 we are starting to see very obnoxious valuations in parts of the market, along with of course massive moves in commodities as a liquidity tsunami that makes the Y2K gusher look like a leaky faucet has to find a home somewhere.  That does not mean the entire market is rich (although small caps are now trading at well over 30x earnings!), but I've posted a few stories the past few months of analysts who (just as in 1999) cannot make any sensible valuation call off traditional metrics so have to create new ones and/or use years like 2015 to justify their price targets.  This is the exact same behavior seen in 1999 - but when you have central bankers intent on blowing bubbles you have to play along on Wall Street since Ben is your friend.

Barron's has a pretty lengthy piece on this topic, using Salesforce.com as its centerpiece - it is quite a damning piece of poetry, and it brings up one of my other huge pet peeves, the use of nonGAAP earnings versus GAAP.  This market that is "reasonably priced" would be so much more expensive if we did not live in a fantasy land of saying ABC expenses don't really count in earnings reports.  The biggest one being options expensing.  A long discussion on that topic here [Apr 24, 2009: Operating v As Reported Earnings]  Needless to say S&P 500 earnings of "$95" for 2011 (or any year) would be a far lower number if we did not all wink and nod at each other as we ignored very real expenses that companies call "one time" (and hence we are told to ignore) but magically have each quarter. 



Anyhow, if you are a Salesforce.com (CRM) investor (or just want to see the reality behind the curtain) feel free to jump here.

  • Wall Street has been accused of many things, but rarely of a lack of imagination. Consider Salesforce.com. Its shares are amazingly expensive, when weighed by traditional valuation metrics. So analysts have come up with creative ways to gauge its results
  • The stock, which has risen 92% over the past year, recently was changing hands at $132—300 times the 44 cents a share in earnings that it's expected to report for its current fiscal 2011 year, which ends on Jan. 31, and 240 times the 55 cents likely for fiscal 2012
  • But most analysts dismiss those numbers as misleading, given their view of the company's prospects and revenue growth. Instead, they prefer—shades of the dot.com bubble!—to discuss cash flow or earnings that exclude the very real downdraft exerted by the company's huge employee-options expense.

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