Salesforce: Should I Buy CRM Stock? 3 Pros, 3 Cons

by Tom Taulli | February 28, 2014 1:34 pm

The fourth-quarter results for Salesforce (CRM[1]) were somewhat disappointing. On the news, CRM stock has fallen off about 5% in today’s trading.

crm-stock-salesforce-stockThe revenue numbers actually beat the Street expectations, both for Q4 and the full year. But the Salesforce earnings guidance was a bit light, as the company expects profits of 9 to 10 cents per share. Wall Street was looking for 10 cents per share — and, as always, hoping for a little more.

Despite the drop in the stock, the past year has still been strong. During the period, CRM stock has gained 50%.

So, going forward, can investors expect more strength from CRM stock? Or should there be some caution? To see, here’s a look at the pros and cons:

CRM Stock Pros

Cloud leader: Cloud computing is red hot, these days. The technology leverages the Internet to deliver applications for business. In the case of CRM, the company is a pioneer in the industry (the company was founded in the late ’90s), having started with a focus on customer relationship management software. Because of the advantages of cloud computing — lower costs, ease of use and real-time data — the company was able to crush its competitors. The result has been that Salesforce has turned into a major global software operation. In the latest quarter, revenues hit $1.15 billion — up 37% on a year-over-year basis.

Salesforce1: Over the years, CRM has been aggressively adopting new innovations, like mobile and social media. The problem? The technology has often been disconnected. To solve this problem, CRM launched Salesforce1. It’s a single platform that allows third-parties developers to build applications that connect with multiple devices. The service is already getting lots of traction. For example, Salesforce1 already has more than 250 partners like Evernote, Dropbox, LinkedIn (LNKD[2]) and Hewlett-Packard (HPQ[3]).

Acquisitions: To keep ahead of the market, there is often no choice but to buy best-of-breed companies. This has worked for Facebook (FB[4]) and Google. That strategy has also been a winner for CRM. Perhaps the most important deal has been for ExactTarget, which is a top provider of cloud-based marketing services. By integrating with sales data, the application should be even more powerful — helping with one-to-one marketing. The market opportunity is also massive. According to Forrester, the spending on digital is forecast to double over the next five years and represent 30% of all marketing expenditures.

CRM Stock Cons

Profitability: Profits have been elusive for CRM. True, investors don’t seem to care much, as the focus has been on top-line growth. And perhaps CRM can continue this approach for the long haul. After all, Amazon (AMZN[5]) has kept that up for years, right? But there may be a point when investors will want to see strong profits.

Valuation: CRM stock is not cheap. The forward price-to-earnings ratio is at a nose-bleed 92. CRM stock is also trading at a price-to-sales ratio of 11. Something else: CRM’s cash position is not robust. Actually, during the past year, it dropped from $1.8 billion to $1.3 billion. If the company wants to pursue more acquisitions, it may be forced to borrow money or issue more stock, which would be dilutive.

Security: CRM is entrusted with huge amounts of company data. That’s a sign of strong trust with its customers. But it is a risky position to be in. As seen with companies like Target (TGT[6]), data breaches are a constant threat. And if CRM does suffer one, the consequences would be severe.

CRM Stock Verdict

For the second year in a row, Fortune named CRM the most-admired software company in the world. And this honor is well-deserved. The company has been the driving force in making cloud-computing a major force.

Critical to that reputation has been a focus on innovation, such as with social media and mobile. At the same time, CRM has pulled off some key acquisitions.

True, the valuation of CRM stock is expensive, and Salesforce earnings have been lackluster. Then again, Wall Street probably won’t put too much attention on those factors. Most investors seem convinced that the company will continue to grow, and so far, it hasn’t proved them wrong.

So should you buy CRM stock? Yes, if you want to benefit from the cloud computing, this is still a good way to do it.

Tom Taulli runs the InvestorPlace blog IPO Playbook[7]. He is also the author of High-Profit IPO Strategies[8]All About Commodities[9] and All About Short Selling[10]. Follow him on Twitter at @ttaulli[11]. As of this writing, he did not hold a position in any of the aforementioned securities.

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