360° Coverage : Salesforce.com Shows Insanity Of Growth At Any Price

2 Updates

Salesforce.com Shows Insanity Of Growth At Any Price

Mar 4 2014, 2:32pm CST | by

Every generation learns its painful lesson about valuation discipline. A deep recession invariably destroys stocks selling over twice the market’s multiplier of earnings or cash flow. At the peak of...

Filed under: news

 
 
 

33 weeks ago

Salesforce.com Shows Insanity Of Growth At Any Price

Mar 4 2014, 2:32pm CST | by

Every generation learns its painful lesson about valuation discipline. A deep recession invariably destroys stocks selling over twice the market’s multiplier of earnings or cash flow. At the peak of the Internet bubble in 2000, NASDAQ 100, my favorite and readily usable index, ticked over 4,800. It dropped to 1,000 in the financial meltdown of 2008 – ‘09. Although the S&P 500 Index more than doubled from its low, NASDAQ then ticked up to 3,800.

Year-to-date NASDAQ 100 is ahead of the S&P 500 Index by a couple of hundred basis points and did rise 38% during 2013. I’m a confirmed skeptic, with under 10% of my capital in outrageously priced paper, including Salesforce.com. I’ll admit to owning Amazon and Facebook, too, but I expect punishment for such exuberance, sooner or later.

In the back of my mind churns the axiom that the life of a growthie rarely exceeds 10 years, five years the norm. Apple, now, exceeds this norm. So does Google. Coca-Cola, IBM, Intel, Oracle et al. became also-rans, striving now to reinvent themselves. Xerox, Polaroid and Eastman Kodak struggled but failed miserably decades ago.

Consider today’s glamorously draped beauties. Start with Facebook because you can rationalize its current valuation. This is unlike Salesforce.com which I cut back on its revelatory yearend 2013 earnings release. Most tech analysts recommend Salesforce.com based purely on revenue growth rate pegged at 30% at least in 2014. Twitter and Yelp rest far beyond my modeling powers.

Facebook, sells under 20 times 2015′s EBITDA ratio even after its gutsy acquisition of WhatsApp for $19 billion (55 employees, no revenues to speak of), but headed towards a billion users on its Internet message network. Access is pegged at a buck, annually, a great service but as yet no contemplative advertising revenues. Facebook sells under 10 times 2015′s projected revenues which is considered a rock bottom bargain ratio. Ahem! This holds water only if you grow revenues north of 30%. Post 2015 Facebook’s momentum should decelerate.

Salesforce.com last Friday dropped overnight 6% even though management met its numbers, earlier dished out to analysts. This pernicious system of “management guidance” keeps The Street from going off the deep end on its projections. Sooner or later, if you passively accept management’s guidance they will bury you.

Tech analysts act like reporters at a Presidential press conference, looking for nuances in gobbled down reportage. If Salesforce.com had missed its quarterly revenue number by just 1%, all hell woulda broken loose, probably a 10% schmeiss for the stock. The surmise would be management had lost control of its growth trajectory, and worse lay ahead. More often than not momentum players would bang out at least half their position.

What do you get for your $63 share entry price herein? Nothing much more than a dream and a prayer – what Willy Loman fed on as a salesman on the road. God help Willy if he didn’t keep a spit shine on his black wingtipped shoes.

Salesforce.com’s 37% revenue growth yielded next to nothing for its shareholders. Diluted non-GAAP earnings hit 7 cents a share in its fourth quarter 2013, but GAAP earnings were negative by 19 cents. Anytime a tech house’s disparity is wide between GAAP and non-GAAP earnings, I look for share dilution. For this baby, it’s enormous.

This is a near $40 billion market cap piece of paper. For the fiscal year ended January, share count bulged some 33 million shares. At $60 a share, management and key employees received compensation of approximately $2 billion, over 5% of the company’s market capitalization on minus zero adjusted earnings. Another slant – insiders received 40% of the company’s projected revenues for 2014.

I’ve never seen a construct like this, but I haven’t looked too zealously. The norm is management and staff are awarded 10 to 15% of annual earnings. Even this ratio is considered generous by me. Qualcomm’s case and others where the chief executive sets research and development priorities in a rapidly changing business, I’ll accept this 15% payout construct.

The fraternity of tech analysts brushes me aside, pontificating that earnings, at least next several years have nothing to do with the trajectory of the stock. Sole pivotal metric is revenue growth which my house analyst pegs at 31% this year and 24% for 2015. If he misses by one percentage point the stock surely tanks and I’d push him out the office window.

Optimistic projections of other metrics like EBITDA and operating margins, if you accept them, put Salesforce.com at an EBITDA ratio this year near 40 times. Even if operating margins move from negative to positive 10%, earnings tot up to 47 cents a share. This is about 120 times, on a price earnings ratio measurement. Let’s assume they make $300 million this year; it’s possible, but management likely awards itself another 30 million shares worth $2 billion or more.

Analysts tell me this is OK because management is attracting busloads of sales personnel with options grants. Eventually, they will harvest earnings. Maybe yes, maybe no.

The only other large capitalization property that sells anywhere near Salesforce’s premium is Adobe, which I throw up my hands as unanalyzable. They are at least close on an enterprise value to sales ratio two years out, approximately 7 times. So what?

Isn’t this too much ciphering to justify the valuation of a cloud software house? A fair question is which constituency is Salesforce’s management running the company for? So far they are big winners in terms of asset accumulation in their stock, gratis.

Shareholder dilution of 5% holds constant, excessive for me to swallow much longer. When does it end? When does management’s “take” relate to some reasonable percentage of earnings, say 10 to 15%?/>/>

The answers may be blowing in the wind. Analysts are jumping through their asses to rationalize this baby. Maybe, they’ll get away with it. I’ll take my chances on Facebook and Amazon which I can model with some certitude, placing them in the firmament of Internet houses with position on the board.

The deep basic is Salesforce pays out 12% of revenues in stock compensation. Most tech houses’ payout is 12% of earnings. Passive shareholders must accept equity dilution running at 5% per annum, a heavy cross to bear. Software houses when they’re small use Salesforce’s construct, but for a house running at a $5 billion revenue clip that is beginning to decelerate the quandary is whether this isn’t a “Hail Mary pass” from their 40 yard line.

Contrast all of this with Amazon, analogous in the sense of a big revenue generator with minimal reported earnings. Dilution from stock issuance runs under 1%.  Amazon sits with $11 billion in liquidity and stock based compensation relative to revenues running at 1.5% vs. Salesforce’s 12%.

I was around for the 1974 debacle in growth stocks. That’s 2 generations ago in terms of shelf life for tech analysts composing optimistic music sheets on software houses.

Sosnoff owns personally and / or Atalanta Sosnoff Capital, LLC owns for clients the following investments cited in this commentary: Salesforece.com, Amazon, Facebook, Apple and Google.

mts@atalantasosnoff.com

Follow Martin Sosnoff on Facebook

Source: Forbes Business

 
Update
2

7 weeks ago

Khazanah throws MAS RM6b lifeline

Aug 29 2014 5:01pm CDT | Source: Business Times Singapore

August 30, 2014 1:15 AMKHAZANAH Nasional will inject RM6 billion (SS$2.4 billion) over three years to resuscitate loss-making Malaysia Airlines (MAS) under a recovery plan that includes even an Act of Parliament. Other key moves are migrating its operations, assets and liabilities to a new c ...
Source: Business Times Singapore   Full article at: Business Times Singapore
 

 
Update
1

8 weeks ago

MAS posts loss of RM307m for Q2

Aug 28 2014 5:00pm CDT | Source: Business Times Singapore

August 29, 2014 1:13 AMMALAYSIA Airlines (MAS) registered a loss of RM307 million (S$122 million) for the second quarter to end-June, but warned of worse to come in the second half when the "full financial impact of the double tragedies of MH370 ...
Source: Business Times Singapore   Full article at: Business Times Singapore
 

 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

Twitter declares war on passwords
San Francisco, Oct 24 (IANS/EFE) Twitter formally declared war on passwords during a developers' conference in San Francisco, unveiling a new system that allows users to log-in to mobile apps with a phone number.
 
 
Ebola not to upset Africa's overall growth: IMF
Harare, Oct 23 (IANS) The Ebola outbreak in West Africa, which has claimed 4,500 lives, will have minimum impact on continent's overall growth, a top International Monetary Fund (IMF) official said Thursday.
 
 
Second MERS case reported in Qatar
Doha, Oct 23 (IANS) A 43-year-old man in Qatar has tested positive for Middle East Respiratory Syndrome (MERS) in the second confirmed case of the deadly virus in 10 days, media reported Thursday.
 
 
OPEC daily basket price falls again
Vienna, Oct 23 (IANS/WAM) The basket of 12 crude oils of the Organization of Petroleum Exporting Countries (OPEC) closed at $81.94 a barrel Wednesday compared to $82.09 Tuesday, the OPEC Secretariat said.
 
 
 

Latest from the Network

Second MERS case reported in Qatar
Doha, Oct 23 (IANS) A 43-year-old man in Qatar has tested positive for Middle East Respiratory Syndrome (MERS) in the second confirmed case of the deadly virus in 10 days, media reported Thursday. The patient had...
Read more on Business Balla
 
Two people die in Pakistan bomb blast
Islamabad, Oct 23 (IANS) At least two people were killed and 12 others injured in an explosion that took place in Pakistan's Balochistan province Thursday, media reported. The bomb was planted on a motorcycle, Dawn...
Read more on Politics Balla
 
Trott extends contract with Warwickshire till 2017
London, Oct 23 (IANS) England batsman Jonathan Trott, whose mental issues led to his abrupt departure from last winter's Ashes tour, has confirmed his successful comeback to competitive cricket by signing a new three-...
Read more on Sport Balla
 
Srikanth, Kashyap big movers in BWF rankings
Kuala Lumpur, Oct 23 (IANS) Indian men shuttlers Kidambi Srikanth and Parupalli Kashyap jumped seven places each in the latest Badminton World Federation (BWF) rankings released Thursday while Olympic bronze medallist...
Read more on Sport Balla
 
Alvin Stardust dead
London, Oct 23 (IANS) English singer Alvin Stardust died after a short illness. He was 72. Stardust's manager confirmed the news about his demise Thursday, reports mirror.co.uk. He was recently diagnosed with...
Read more on Celebrity Balla
 
Indian man reunited with family after 40 years
Dubai, Oct 23 (IANS) An Indian man, who had disappeared from his hometown in Kerala nearly 40 years ago, has been found by his family at a hospital in Dubai in the UAE, a newspaper report said. Now in his 60s, Abdulla...
Read more on Politics Balla
 
Srikanth, Kashyap, Saina rise in world rankings
Kala Lumpur, Oct 23 (IANS) Indian men shuttlers Kidambi Srikanth and Parupalli Kashyap jumped seven places each in the latest released Badminton World Federation (BWF) rankings Thursday while Olympic bronze medallist...
Read more on Sport Balla
 
Flintoff signs for Big Bash side Brisbane Heat
Brisbane, Oct 23 (IANS) Former England captain and all-rounder Andrew Flintoff, who retired from international cricket in 2009, Wednesday confirmed that he will play for Brisbane Heat in the Big Bash League (BBL) this...
Read more on Sport Balla
 
OPEC daily basket price falls again
Vienna, Oct 23 (IANS/WAM) The basket of 12 crude oils of the Organization of Petroleum Exporting Countries (OPEC) closed at $81.94 a barrel Wednesday compared to $82.09 Tuesday, the OPEC Secretariat said. The new OPEC...
Read more on Business Balla
 
Lopez to sign multi-million dollar deal?
Los Angeles, Oct 23 (IANS) Singer-actress Jennifer Lopez is reportedly in the final stages of securing a multi-million dollar deal to perform in Las Vegas. The 45-year-old is being offered $350,000 per show at The...
Read more on Celebrity Balla