Cloud leader Salesforce.com (CRM) is on pace for another banner year. The company has been growing like a tech startup, despite having been around for a couple of decades.
So far this year, CRM stock is up a sizzling 34%.
Getting to this point wasn’t easy, though. CRM had to work extremely hard to get customers to trust the cloud. After all, there was lots of doubt about security as well as the speed and versatility of the technology.
Yet CRM CEO and co-founder Marc Benioff had a powerful vision and was tireless in promoting it. Another advantage was that he had a successful history in the tech industry, with stints at great companies like Apple (AAPL) and Oracle (ORCL).
But going forward, is there still opportunity with CRM stock? Or should investors wait for a better price? To see, let’s take a look at the pros and cons.
CRM Stock Pros
The Cloud Megatrend
The cloud has gotten lots of traction in recent years, largely due to its convenience. For example, there is no need for costly updates — say by installing CDs — because all upgrades are seamless. There is often less need for consultants because cloud software is often developed with a focus on ease-of-use for the user. Also, by centralizing the database, a cloud app offers valuable analytics and trend reports.
Given all this, it should be no surprise that the cloud market continues to grow at a hefty pace and is passing by laggard companies like IBM (IBM) and Oracle. According to Gartner, the amount of worldwide spending on the cloud is expected to jump from $130 billion in 2013 to $243 billion by 2017.
The cloud is also particularly useful for leveraging mobile — another recent megatrend. Let’s face it, smartphones and tablets are critically important for businesses these days. The good news is that CRM has been an early player in both the cloud and mobile, which has definitely made it tough for rivals to get an edge.
CRM has always done a good job getting customers to write checks. And the amounts seem to get bigger and bigger.
Just look at the latest quarterly report: Revenues surged by 27% to $1.7 billion, which was a faster rate than the top 10 enterprise software companies. In fact, at the current pace, CRM expects to become the world’s No. 4 enterprise software company by next year, behind only Microsoft (MSFT), ORCL and SAP (SAP).
And there are no signs that the growth will slow down anytime soon. CRM stock has put out a forecast of 20% revenue growth for next year.
Cloud Operating System
CRM does more than just sell apps for sales and marketing. Keep in mind that the company has leveraged its cloud system to allow partners to create their own technologies.
Often, CRM will invest money in the partner and then put together a contract to get licensing fees. This has been done with successful companies like Veeva Systems (VEEV), InsideSales.com and FinancialForce.com.
CRM can even help older tech companies to go to the next level, as seen with the case with Sage, a provider of accounting software. Unfortunately, over the past few years, the company has floundered. So Sages’s new CEO, Stephen Kelly, made a bold move: He used CRM software as the platform for one of his key accounting packages. The process took only 26 weeks to complete, and the app now has cutting-edge features like collaboration, analytics and seamless mobile access.
All of these things are good for CRM stock. But on the other hand…
CRM Stock Cons
Growth has slowed down considerably for Salesforce’s customer relationship management division, coming to only 10% in the latest quarter. This should not be too much of a surprise since the market is fairly mature and CRM is the dominant player.
In order to find growth, the company has had to expand into other categories.
However, there are concerns, especially with the Marketing Cloud. Even though revenues were up 29% in the latest quarter, the fact is that growth has been uneven. Also, the total revenues came to only $169 million (the lowest amount among the four cloud product categories for CRM). Even worse, the aggressive spending on acquisitions has not had much of an impact (the company has purchased firms like ExactTarget, Radian6, Buddy Media and Social.com).
Heavy competition will also weigh on CRM stock’s core business.
CRM apps aren’t necessarily cheap. Actually, according to Forrester, there are signs that customers are starting to push back on prices. A survey shows that 52% of customers indicated that CRM solutions had a “high cost of ownership over time” and 42% believed that there is a “rigid and inflexible pricing model.”
But perhaps the most alarming finding was that 43% said they would renegotiate when the contract comes up for renewal.
Over time, the aggressive pricing may ultimately provide openings for rivals to poach customers. Let’s face it, all of the old-line tech operators, like IBM, Oracle, SAP and Microsoft, are investing heavily in their cloud offerings. So, even if their applications aren’t at the same level of CRM, they might be enough for a potential customer on a tight budget.
The CRM stock price isn’t cheap, either. Note that the forward price-to-earnings ratio is a nose-bleed 80.
If there’s even a slight deceleration in the growth rate, the valuation could easily get knocked down. And as indicated above, there are well-heeled rivals that are working hard to get a chunk of the business from CRM.
Something else to consider: According to CNBC.com, it looks like Microsoft abandoned its bid for Salesforce.com earlier in the year because of the valuation. MSFT was willing pay pay $55 billion but CRM was holding out for $70 billion.
As of now, CRM has a market cap of about $53 billion.
Bottom Line on CRM Stock
If there was a Hall of Fame for Technology, Marc Benioff would be an easy choice as a member. Over the past 15 years, he has unleased massive change in the business software market, not only in terms of the technology but also the business model.
And yes, shareholders have been greatly rewarded. Since the IPO in 2004, CRM stock has clocked a gain of 1,760%.
Going forward, it looks like the growth should continue as companies move towards the cloud as well as mobile. AND there should be a nice boost from the aggressive moves into various industry categories.
But does that mean you should buy CRM stock? Yes — even though the valuation is at premium levels, CRM stock deserves that multiple because the company’s growth remains in tact as the technology is spot-on for key trends of the cloud and mobile.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.