SumZero Contrary View: Salesforce.com (NYSE: CRM)

Salesforce.com (NYSE: CRM) -- $143.70

(The following information comes directly from SumZero’s community of buyside analysts.)

Wall Street Consensus on Salesforce.com: Buy
11 Strong Buy, 20 Buy, 6 Hold, 0 Underperform, 4 Sell

Wall Street Price Target
Mean: $161.58
Median: $165.50

SumZero Contrary View
Salesforce.com generates ~80% if its sales from the increasingly commoditized and penetrated sales CRM product segment. The company still expects ~60% of its growth to come from gaining market share from on-premise solutions by the likes of Oracle (Nasdaq: ORCL), SAP (NYSE: SAP), etc.

The company is achieving this by offering aggressive discounts (anecdotal evidence points to discounts of 80%+ for large contracts). So far Salesofrce.com has been able to maintain 30%+ revenue growth despite the deteriorating operating environment in sales by achieving huge volume growth and spending >$800m on acquisitions in the past 21 months. However, the problems have clearly started to show up in earnings and cash flows.

Realizing this, the company is trying to expand into new areas such as enterprise collaboration and cloud platform management. The prior is almost impossible to monetize while the latter is a very crowded segment (Amazon (Nasdaq: AMZN), Google (Nasdaq: GOOG), VMWare (NYSE: VMW), Microsoft (Nasdaq: MSFT), etc) where Salesforce.com’s offering is often inferior and price competition is very intense.

We see a hyped company operating in an increasingly commoditized segment that is trying to maintain high levels of top line growth at any cost. So far it has achieved that by competing aggressively on price and adding revenue through acquisitions. In the meantime, it is masking the heavy cost of this strategy by paying its people in stock and generating high deferred revenue through billing gimmicks. However, eventually reality will catch up with them as the core CRM product becomes penetrated to the extent that further growth becomes difficult and other segments are difficult to monetize.

When revenue growth begins to materially slowdown investors will look at earnings and cash flows (which have been destroyed by the aggressive expansion strategy) and the stock will sell off. As the stock sells off, employees will no longer accept stock as a key part of their compensation and Salesforce.com will have to start recognizing the real expenses of its workforce.

Price Target: $50.00

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