Salesforce’s Split Could Be a Bad Sign

Cheaper price might be an attempt to offset slowing growth

   
Salesforce’s Split Could Be a Bad Sign

Since coming public in 2004, Salesforce.com (NYSE:CRM) has been soaring. In 2012, for example, shares rocketed 68%. The company is the pioneer of the cloud revolution — technology that uses the Internet to deliver business applications and has proven to be more effective and cheaper than traditional software.

Now, though, CRM’s stock is sitting around $175, making it a bit pricey for a retail investor. Heck, to buy 100 shares, you’d need to plunk down over $17,500, not even including any transaction fees — certainly a turn-off for mom and pop.

To deal with this, CRM has announced a 4-for-1 stock split, meaning investors will have to pay just over $4,300 for that same number of shares. The stock’s gained 2% on the news.

Of course, many stuffy finance professors would laugh at such a move, as would some of the world’s legendary investors like Berkshire Hathaway‘s (NYSE:BRK.A, NYSE:BRK.B) Warren Buffett. To them, a stock split just means that a company has boosted the number of shares — nothing more.

But when it comes to investing, human psychology can certainly play a role. For example, I sometimes hear from investors that they want to buy shares in Google (NASDAQ:GOOG) but cannot afford them. They don’t mention any kind of valuation metrics — like a price-to-earnings ratio. Instead, it’s really just about the stock price.

Along those lines, Jim Cramer has a post on why he thinks this kind of thinking will ultimately be a boost to CRM.  Simply put, with more retail interest in the stock, there should be less of an impact from the aggressive hedge funds.

I’m not so sure. First of all, it’s far from clear how much interest there will be for CRM. Let’s face it — the typical investor probably does not know much, if anything, about the company or the cloud.

Instead, CRM’s move could actually be a signal that the growth rate will start to slow down. Trying to get retail investors in the stock could help to soften the blow.

Keep in mind that CRM’s stock is already trading at nosebleed levels, with a forward price-to-earnings ratio of 70. There are also some signs of deterioration in spending on enterprise software; just look at Oracle‘s (NASDAQ:ORCL) horrible quarter. And with the federal government’s sequester, there may be even more pressure on spending for the rest of the year.

A high-multiple stock like CRM could be vulnerable to a hefty drop if it fails to meet expectations. And unfortunately, by ginning up retail interest, investors may be in the terrible position of buying a stock at a peak.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of “How to Create the Next Facebook” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.”Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2013/03/salesforces-split-could-be-a-bad-sign/.

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