Is Salesforce.com The Next Netflix?

Netflix (NFLX) is the last high flying growth stock to come tumbling down. Netflix is now below $130 per share after being over $300 a share just two months ago. Now that Netflix has come tumbling down, I would like to take a look at another growth stock that is due for a drop.

Salesforce CRMSalesforce.com (CRM) has been a market favorite and attracted capital from money managers searching for growth. The stock has been touted by CNBC’s own Jim Cramer. Salesforce.com makes its money selling customer relationship management software to businesses. The company has a vibrant business with growth of 50% plus over the past five years and 35% plus growth over the past three years. Last quarter the software company saw revenues increase 34% as the firm added 6,300 new customers.

The company is in good financial condition with $577 million dollars in cash and short term investments with $530 million dollars in debt. Free cash flow has grown from $168 million dollars in 2009 to $368 million dollars in 2011. Operating and profit margins have been squeezed coming in at 0.84% and 1.46% in the current year.

Every analyst seems to be incredibly bullish on the company which is why investors need to be careful with this stock. Investors seem to always get burned when they are wiling to buy growth at any price.

Challenges For Salesforce.com

Salesforce.com faces the problem of higher acquisition costs for customers as the firm grows and increased competition form larger competitors like Oracle (ORCL) and SAP (SAP). NetSuite and Microsoft (MSFT) also plan on competing against Salesforce.com in the enterprise solutions space. Salesforce.com is heavily dependent upon external companies for the success or failure of its operating platform. It is never good when a company has depend on outside companies to host its primary business.

My biggest problem with the company is the stock’s valuation. The company is expensive based on any metric that you choose. Salesforce.com trades at 92 times this year’s earnings estimates, 12 times book value, 9 times sales, and 36 times free cash flow. At these levels, the stock seems to have gotten ahead of itself. If you want to buy growth at any price then Salesforce.com is a company that you might want to buy.

In my opinion, the stock is priced for perfection and that is always a bad thing. Any sign that earnings growth is waning or customer growth is slowing and this stock will quickly come tumbling down.

Photo by: Sean Mac Entee

Comments

  1. Salesforce is RAKING it in! I see them everywhere in SF and living large. Seriously, it’s crazy.

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