Salesforce.com, Inc. (NYSE:CRM), whose rapid growth makes up for a compelling shortage of earnings, warned shareholders that its first quarter may not be what they hope for. Investors have yet to show their feelings by fleeing CRM stock, however.
Instead, analysts listened to the soothing tones of its earnings call, where the company bragged about its past and predicted $10 billion in revenue for the coming year.
Few seem to have noticed the fine print.
Profits for the first quarter are going to be down. That $10 billion in revenue is not going to represent much growth over the fourth quarter’s $2.3 billion sale rate.
Slower growth could hammer the stock, whose market cap of $57 billion means a price to sales ratio of 5.7, assuming the company meets its estimates. That’s a ratio comparable to that of Alphabet Inc (NASDAQ:GOOGL), only without the profits of Google.
For CRM stock, the future is now. But perhaps, by forging an alliance with International Business Machines Corp. (NYSE:IBM), its future now might be in its past.
Looking Beyond the Cloud
Salesforce has more than doubled its revenues since 2012 based on cloud applications. The company’s ticker symbol, CRM, stands for Customer Relationship Management, the first major enterprise database application to move from corporate data centers into less-expensive clouds. But since then the company has built a full suite of such applications, and all have been successful.
The enterprise cloud has been very, very good for Salesforce.com, and competitors have done more than take notice. Cloud is now the default home of major database applications. Competitors like Microsoft Corporation (NASDAQ:MSFT), Oracle Corporation (NYSE:ORCL) and IBM all now brag about the size of their clouds, and the sophistication of enterprise applications built on them.
The S-shaped “sales curve,” of slow growth in a new market, rocket-like growth as mass markets adopt something and slower growth once that is achieved, is approaching the end of the line for cloud. CRM stock bulls insist that things like the internet of things will keep growth going, but each new niche now brings big-time competitors with it, such as General Electric Company (NYSE:GE), which calls its industrial IoT cloud Predix.
As markets mature, they consolidate. Competitors pair up, starting with alliances, then moving naturally toward mergers. Having fewer competitors means they can maintain pricing, and margins, even as growth slows.