From a broad standpoint, the story at Salesforce.com (NYSE:CRM) is pretty simple. The business is hugely attractive. But CRM stock looks overvalued.

Obviously, there’s much more to it than that. But that general split — great business, questionable valuation — seems prevalent across the market. Many of those stocks have provided outstanding returns, including CRM stock, which has risen 247% in the past five years and 63% just in the past twelve months.

Indeed, many investors have the same perception of the entire market. The news is good between tax reform, GDP growth and low unemployment. But as bears have argued for some time, market-wide valuation numbers look awfully high — and potentially unsustainable.

CRM stock seems like the epitome of those market-wide concerns. How an investor views the stock at the moment likely comes down to her view of those concerns — and her strategy for reacting. And how CRM stock will perform going forward likely comes down to just what multiples investors are willing to pay — and for how long.

An Attractive Business Model

Salesforce.com itself has a fantastic business model. It is the premier CRM (customer relationship management) software provider. It popularized the SaaS model which is now being used across the software space.

Salesforce displaced existing CRM leaders SAP (NYSE:SAP) and Oracle (NYSE:ORCL). It has a huge market share lead on tech giants Microsoft (NASDAQ:MSFT) and Adobe Systems (NASDAQ:ADBE).

Looking forward, users are extremely “sticky,” with switching costs high. And there’s plenty of room for growth, with Salesforce revenue increasing 27% in its most recent quarter.

All told, there are few businesses in the market that seem more desirable than that of Salesforce.com. Competition probably is the biggest concern here, with SAP in particular taking aim with its cloud strategy. The addressable market may shrink over time, as Larry Ramer has pointed out. Still, Salesforce is the unquestioned leader in the space (with little reason to suggest that will change any time soon). And it’s an attractive business in which to be.

CRM Stock Valuation

Of course, it’s not as if the market isn’t paying attention. CRM’s market cap now has cleared $100 billion — and valuation metrics look stretched. CRM stock trades at 64 times the high end of its fiscal year 2019 earnings-per-share guidance. Price-to-free cash flow multiples are more reasonable, but still dear, at 40. And much of that free cash flow (over half the FY18 figure, in fact) is coming from deferred revenue builds that will slow in importance over time.

Even that 64x figure is based on non-GAAP figures — which exclude stock-based compensation. Salesforce’s own guidance suggests that excluding that expense provides a $1.66 per share benefit — more than two-thirds of guided earnings. Backing that out (and it’s not free; dilution matters), the P/E ratio is over 200.

However you look at CRM stock, it’s pretty obvious that the company is exceedingly highly valued on an earnings basis. And while that alone isn’t necessarily a reason to sell, this also is a company heading into its 20th year. And for a mature company, Salesforce.com looks awfully expensive.

What Should (or Will) Investors Do?

The dilemma here isn’t uncommon in this market. Investors are comfortable paying big multiples for growth. Few, if any, investors believe that Netflix, Inc. (NASDAQ:NFLX) is going to be a declining business. The question is whether it’s worth $400-plus per share.

ADBE looks awfully similar, with big multiples, even better returns of late (+432% over 5 years) and a sense that, at some point, the run has to end. Align Technology (NASDAQ:ALGN), SaaS peer Splunk (NASDAQ:SPLK), Shopify (NYSE:SHOP), Square (NYSE:SQ) — they all seem to invoke the same reaction. Yes, this is a great business — but the run in the stock has to stop at some point, right? Surely, valuation matters?

Of course, one problem is that investors have made that argument for some time. And those of us who have been wrong (as I have been on both Netflix and Square) are loathe to make that same case elsewhere. Street analysts seem to be constantly catching up (CRM stock, once again, is nearing consensus targets). And shareholders — perhaps, wisely — can dismiss any valuation concerns as short-sighted. After all, weren’t writers and analysts questioning CRM at $60? And NFLX at $200?

How an investor reacts in the case of CRM stock in many ways comes down to that investor’s larger trading strategy. For some, there’s a simple reason to buy CRM stock: it’s silly to fight the tape. As long as the “story” continues, the stock can keep rising.

For others, the gains seem unsustainable. Whether it’s FOMO (fear of missing out), low interest rates or a central bank-induced bubble, valuations have run amok. And at some point, the bill will come due. If that’s the case, CRM stock could plunge.

The important question, however, is when — and how far.

As of this writing, Vince Martin has no positions in any securities mentioned.