Monday, February 28, 2011 (CRM) Finally Stalling?

Interesting past 2 days for juggernaut (CRM).  After reporting Thursday evening, the stock scorched short sellers with a huge gap up open at $147ish... then has proceeded to sell off continuously since; both Friday and this morning.  The stock seems to tire in the $145-$150 area the past few months, and has once more broken its 50 day moving average.  When the stock did this in January, it simply turned on a dime and made a mad dash, ignoring the technical damage.  What is interesting here is there is a yawning gap that asks to be filled from November, which is almost the exact price level of the 200 day moving average.  But very few have the strength, or patience to try to short this puppy for any period of time since valuation means nothing.

I won't recreate the wheel on the earnings - the Wall Street Journal shows some of the issues with the company which despite very nice revenue growth, struggles to post increasing profits - especially of the GAAP variety.  
  • Salesforce's sales grew 29% last quarter, but its total operating expenses soared 40% to $365 million. As a result it actually booked a loss – of $391,000 – from operations. 
  • Even for the full year, sales rose 28% but costs rose faster, with the result that operating income actually fell by 15%. The company made a mere $97 million at the operating level out of $1.55 billion in sales.
  • Where's the money going? So many places. It's hiring new staff aggressively, including around 500 just last quarter. It's paying sales staff huge commissions, plus big incentives including in stock.
  • And it's not just the cash that's flying out the door. A lot of stock is flowing to staff in the form of incentives. That's a real cost to investors, too. The numbers tell the story. Six years ago, soon after Salesforce went public, the annual report revealed that there were a total of 111 million shares in existence. Today: 140 million. And next year, management warns, it will rise to 145 million.
  • Now look at earnings. Under generally accepted accounting principles, earnings per share at this growth company plunged 25% last year to 47 cents. That included a 50% fall in the fourth quarter. By that measure, Salesforce stock is now about 300 times last year's earnings.

Of course on Wall Street we IGNORE generally accepted accounting principles in favor of NON GAAP where we can ignore so many costs and wink at each other how "cheap" stocks are as long as don't count things as massive option handouts....
  • Management has been selling the stock.   A lot of it. That's especially true of CEO Mark Benioff. Admittedly, they have been doing this for several years. But according to InsiderScore, Benioff alone sold $220 million worth of stock in the past year.  Net income attributable to the stockholders during the same period? Just $64 million.
  • Management prefers a more generous way of measuring net income. But even by this measure, earnings barely edged up 6% last year to $1.22 per share, and the growth last quarter crawled ahead by a mere 3%. And even that leaves the stock trading on more than 100 times historic earnings.
  • In the next year, Salesforce management now expects the company will earn 11 cents or less (under the strict measurement of earnings) or $1.38 or less (under the more generous measure).
  • Salesforce has plenty of sales growth ahead. There's no question about that. But to justify an $18 billion price tag, it's going to need it. Even to bring the earnings multiple down to a more reasonable, say, 25 times, it will need around $720 million in net income, and so maybe $1 billion in operating income. Right now Salesforce has operating margins of just 6%. 


This gentlemen at Seeking Alpha also does a very good job at sniffing out other issues; but again - with stocks like this, it does not matter until it matters.

No position

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