Lately, Salesforce.com, Inc. (NYSE:CRM) has been garnering some nice support from Wall Street analysts. Morningstar has named the company a top pick for the new year because of the potential for improved margins and Wedbush has reaffirmed its “outperform” rating. In fact, Wedbush increased its price target from $96 to $98. This assumes 36% upside.
All this is certainly great, right? Definitely. But unfortunately, CRM stock has still been mostly a laggard. Since reaching an all-time high in May, the shares have lost about 14%.
OK, so perhaps now is the time to take a look?
Well, the fact is that the company is the pioneer of the fast-growing cloud industry. And its customer relationship management platform continues to be standout — and something that is highly engaging. CRM has continued to make investments in mobile as well as AI (artificial intelligence).
In Q3, the company posted a 25% increase in revenues to $2.14 billion and earnings rose by 14% to 24 cents a share. A key has been traction with large accounts. In the quarter, there was a record number of “seven-figure-plus transactions.”
CRM CEO Marc Benioff also boasted that his company will reach a hefty $10 billion in revenues by 2018.
Yet all this should not necessarily be a surprise since the cloud market appears to be in a long-term growth trend. According to research from Morgan Stanley, the global spending in this category is expected to jump from $70 billion last year to $141 billion by 2019.
CRM Stock Issues
Pumping up growth has not been cheap, as CRM has lost money during four of the past five years. The company continues to spend substantial amounts on marketing and R&D.
Oh, and then there is the aggressive M&A effort. For 2016, CRM pulled off 10 deals and some were fairly expensive. The company paid $800 million for Krux, $750 million for Quip and $2.8 billion for Demandware.
While dealmaking can help boost revenues and provide a broader product offering, there are certainly risks. Let’s face it, there are often complications with integration, having to meld diverse cultures. This gets even tougher when there are many deals.
Besides, there is the potential for a strategic mistake. Hey, CRM actually tried to buy Twitter Inc (NYSE:TWTR), which probably would have been a blunder. It was only after harsh reaction from investors that CRM bowed out. But there should still be concerns since the company may be getting too fast-and-loose with its decisionmaking. Is there really enough due diligence?
As I noted in a post for InvestorPlace.com: “[T]he synergies are, well, elusive. Salesforce sells sophisticated cloud applications to businesses and Twitter is focused primarily on consumers — making money by selling advertising. … Seriously, why would CRM want to get involved with handling streaming of NFL games or presidential debates or dealing with cyber bullying?”
Bottom Line on CRM Stock
Salesforce.com must deal with a competitive environment that is getting more intense. There is not only pressure from fast-growing startups — some of which may come public this year — but also mega tech operators. Microsoft Corporation (NASDAQ:MSFT) has shown the benefits of having a serous cloud strategy. No doubt, companies like SAP SE (ADR) (NYSE:SAP), International Business Machines Corp. (NYSE:IBM) and Oracle Corporation (NYSE:ORCL) are taking note and making substantial investments.
Now, this is not to imply that Salesforce stock will somehow implode. Again, the company has a solid technology platform and a substantial customer base.
Yet it is still important to note that growth has been decelerating — and the M&A strategy is not guaranteed to reverse this. And yes, the valuation on CRM stock is fairly expensive, coming to a forward price-to-earnings multiple of 56X. In other words, it’s probably best to hold off for now.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is a registered investment adviser representative (you can visit his site to learn more about his financial planning services). He is also the author of various books on investing like All About Commodities, All About Short Selling and High-Profit IPO Strategies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
