Salesforce.com (NYSE:CRM) reports second quarter-earnings Aug. 18 after the market closes. Analysts expect EPS of four cents, a 75% decline from last year. Revenues, on the other hand, should rise 34% year-over-year to $528.6 million. It’s a mixed bag, for sure, and likely why its stock is up just 1.6% year-to-date. Regardless of how it does, I don’t like this stock. Here are some reasons why:
What You Get for $100,000
Proponents of higher liquor prices believe raising them reduces excessive drinking. I don’t agree. I believe most people who don’t have a drinking problem consume the same amount every month. If prices are lower, they simply put the savings to use somewhere else in their budget. How does this relate to Salesforce.com? I believe investors work in reverse.
In most cases, investors tend to commit a specific amount of capital to buying stock and then do so at an appropriate price. However, if they can get a bigger bang for their buck, they’ll gladly take the extra shares. I look at Salesorce.com and think: “What can I get for my $100,000?” At current prices, approximately 750 shares. For each of those shares I’m paying $71 for a dollar in future earnings.
If I’m a growth investor, I have no problem paying this multiple because earnings are estimated to increase 27% per annum for the next five years. Such earnings power deserves a premium multiple. If I’m a value investor, I’m thinking there must be a better way. I’d rather pay far less for my dollar in earnings. For the same $100,000, I could buy 583 shares of Intuit (NASDAQ:INTU), 906 shares of Oracle (NASDAQ:ORCL), 618 shares of BMC Software (NASDAQ:BMC) and 1015 shares of Adobe Systems (NASDAQ:ADBE). The earnings yield for these four stocks is 8.9% — 536% greater than Salesforce.com.
A Better Alternative
If you want to read a good article about the future of cloud computing, Andrew Leckey of the Los Angeles Times wrote a good primer July 31. Salesforce.com is a pioneer in the field, which Forrester Research expects to grow almost 500% by 2020 to $241 billion.
There’s no doubt it’s contributed to small-business productivity and cost savings by providing a pay-as-you-go web-based service. However, I have to think the competition is going to heat up once the public starts to better understand what cloud computing actually is.
I currently use the free version of Zoho for writing articles while on the road, and although I’m not a techie, the concept of “free” is a powerful one. I’ve also read Jason Fried’s book, ReWork. Fried is the founder and CEO of 37 Signals, who market Highrise, a Web-based CRM geared toward small businesses. In addition, Microsoft (NASDAQ:MSFT) has Azure, and surely Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN) and Intuit will enter this arena in the future.
This doesn’t mean Salesforce.com won’t experience some measure of success, just that there’s a safer way to hedge your bet. First Trust introduced the ISE Cloud Computing Index Fund on July 5 at an opening price of $20. It was an untimely entrance, dropping 16% in just more than a month. Nonetheless, buying this ETF gives you pure-play cloud computing companies like Salesforce.com, as well as non-pure-play companies like Teradata (NYSE:TDC) and others. Forty stocks in all, its P/E is one-third that of Salesforce.com. If you want a technology position in your portfolio, this is a much smarter buy.
Bottom Line
The truth about value investors is that when push comes to shove, we’re really growth investors in disguise. No business can survive indefinitely without growth, and we know this. It’s just that we want it at a reasonable price. Salesforce.com isn’t.
As of this writing, Will Ashworth did not own a position in any of the stocks named here.
