Will Salesforce.com, Inc. (CRM) Sell Out to International Business Machines Corp. (IBM)?

Advertisement

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.

Is Salesforce.com, Inc. (CRM) Stock Coming Down to Earth?

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.

Alliance Time

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.

This is why some analysts are pushing a merger-of-equals that won’t happen between Salesforce and Adobe Systems Inc. (NASDAQ:ADBE), whose “Creative Cloud” applications would seem a natural fit.

Salesforce’s strategy has been to pick-off smaller application spaces as they appear, as with its 2016 buy of Demandware, which serves online merchants, acquired for $2.8 billion. The company made 10 acquisitions during 2016, and in January it continued this with Sequence, which designs user interfaces, a business now dubbed UX for User Experience.

As a software house, rather than a hardware company, Salesforce has always had to manage its hosting carefully. Its original code came from Oracle, and the companies have had a fraught existence. So over the years, Salesforce has added Microsoft and Amazon.com Inc. (NASDAQ:AMZN) to its partner list, although these relationships are, like love, subject to change on the first suspicion of betrayal.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.

You can add IBM to the list. Salesforce will now mix its data with IBM’s Watson — a quick route into artificial intelligence and, perhaps, into IBM itself.

Where the Ride Ends for CRM Stock

I believe the end of the ride for Salesforce is in sight and IBM would make a compelling destination. IBM now sells at half its sales, its revenues have been declining for years, and Salesforce could halt that slide. With CEO Virginia Rometty approaching 60, often a retirement age at Big Blue, Benioff might make a natural successor at age 52.

Benioff would also give IBM a more entrepreneurial face, and IBM would give him a much bigger playing field on which to perform cloud magic. He has been telling all who would listen that a “roaring” market means Salesforce is not interested in acquisitions. 

How about a sale?

Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he was long AMZN, GOOGL and MSFT.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/will-salesforce-com-inc-crm-stock-sell-out-to-international-business-machines-corp-ibm/.

©2024 InvestorPlace Media, LLC