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General Category => Investment Ideas => Topic started by: nkp007 on May 10, 2012, 10:29:37 AM

Title: CRM - Salesforce.com
Post by: nkp007 on May 10, 2012, 10:29:37 AM
I can't be the only one who loves this company right? The cloud...leveraging social networking...synergies. It's definitely a worth triple what it's trading at!

Just kidding, I've been shorting it for months. I was introduced to the idea when I heard Whitney Tilson talking about it. Do a quick google search and you'll see the many cases against it.

http://video.cnbc.com/gallery/?video=3000053521

The main factors
-No GAAP earnings. Even with their "adjusted" earnings, CRM is trading at a ridiculous 100x multiple

-Insiders executing (and selling) their stock options years before expiry. Check out Todd Sullivan's twitter feed for the play by play.

-The CEO is sketchy.com. I have watched numerous presentations and truly have no idea what's going on. It is buzzwords galore. They talk about how the cloud is reinvigorating everything and how social networking changes everything.

But ultimately, I don't understand why their product is that unique and why Microsoft / whoever can't wipe the floor with them. http://www.youtube.com/watch?v=c4WbbCOHKBs&list=PL81C9FAB11DCA2FFE&index=1&feature=plcp

I could be dumb and just not get it.

-They bought some really nice land near San Francisco for a lot of money. They wanted to build a campus, but recently decided to freeze those plans because they were "growing too fast". In reality, I think it is because they're facing a cash crunch and don't want to stress the coffers

What do you guys think it's worth? I have no clue, but probably a lot less than where it is today. There are risks (someone acquiring them - if Instagram can sell for a billion...), but this thing smells in a few different ways. I decided to short it (significantly cheaper than the puts) with a cost basis ~$130
Title: Re: CRM - Salesforce.com
Post by: oddballstocks on May 10, 2012, 10:55:40 AM
I think the key is you really need to understand the product and the value proposition.  I'm not short or long, but have a good amount of professional exposure.  Companies we work with LOVE it, it's a very easy sell and changes businesses. 

As for growth a friend of mine works for a CRM practice at a major consulting firm, the practice didn't exist two years ago, they'll be doing over $100m this year I believe.  So yes, growth is there, clients love it, there is a big niche factor here.  CRM and MSFT products aren't really comparable, maybe at a summary level investment thesis they are, but at the client level I've never seen them pitched against each other it just doesn't make sense.

I don't know if 100x is overvalued or what, but there is some real world value here, as for an investment no idea.  I do know the product is completely changing the business landscape.  One key I've seen over and over is the buy decision is with a business person not an IT person, this is key.  A dept manager can buy CRM without any IT involvement, no servers, nothing.  Think of this as those pet projects built in Excel on steroids.
Title: Re: CRM - Salesforce.com
Post by: nkp007 on May 10, 2012, 11:16:32 AM
I think the key is you really need to understand the product and the value proposition.  I'm not short or long, but have a good amount of professional exposure.  Companies we work with LOVE it, it's a very easy sell and changes businesses. 

As for growth a friend of mine works for a CRM practice at a major consulting firm, the practice didn't exist two years ago, they'll be doing over $100m this year I believe.  So yes, growth is there, clients love it, there is a big niche factor here.  CRM and MSFT products aren't really comparable, maybe at a summary level investment thesis they are, but at the client level I've never seen them pitched against each other it just doesn't make sense.

I don't know if 100x is overvalued or what, but there is some real world value here, as for an investment no idea.  I do know the product is completely changing the business landscape.  One key I've seen over and over is the buy decision is with a business person not an IT person, this is key.  A dept manager can buy CRM without any IT involvement, no servers, nothing.  Think of this as those pet projects built in Excel on steroids.

Very, very helpful. Thanks.
Title: Re: CRM - Salesforce.com
Post by: keerthiprasad on May 10, 2012, 02:17:35 PM
The clients are extremely loyal.  As far as I know, the switching costs are typically high (not an easy transition to a competitor).  In a previous job, we used salesforce even though there was a competitor offering a similar service 70% less.  The head of sales would have burned the company down before letting us buy anything else. 

But the valuation is definitely ridiculous and management sells a lot of shares...

Keerthi
Title: Re: CRM - Salesforce.com
Post by: DCG on May 10, 2012, 02:23:12 PM
I like the company, and like Marc Benioff (his book 'Behind the Cloud' is a very good read), but don't like the valuation.
Title: Re: CRM - Salesforce.com
Post by: Eric50 on May 10, 2012, 10:44:14 PM
nkp007 - Is there a catalyst in the near term?
Title: Re: CRM - Salesforce.com
Post by: nkp007 on May 11, 2012, 01:56:32 AM
nkp007 - Is there a catalyst in the near term?

My guess is that each earnings call is a potential catalyst given that expectations are so high. Any sign of less growth, less bookings growth, or heightened competition may spook analysts enough to the point where they make "adjustments" to their models.

If that's the case, who knows what happens next. If a model somehow values this thing at $160 or $180 as some do (on no GAAP earnings), I can only imagine what a small adjustment will do.
Title: Re: CRM - Salesforce.com
Post by: ItsAValueTrap on October 31, 2012, 10:45:36 PM
Ok I'm going to bump this thread.  The puts look cheap-ish here... implied volatility is in the low 40s.  (JOE puts are even cheaper, but that's another story.)

They are reporting GAAP losses, so this may no longer become one of those momo stocks that take several years to crumble.  On the other hand, they do have good cash flow because they pay out all that stock-based compensation.  They really know what they are doing.
Title: Re: CRM - Salesforce.com
Post by: HJ on November 01, 2012, 07:00:18 AM
And then there is the report that recently they've laid off quite a bit of people from Rdian 6 and Buddy Media, 2 acquisitions that they spent a combined almost $1 billion on.  It's the first sign of potential operational issue that I've seen coming out of the company.  But the stock trades in mysterious ways.
Title: Re: CRM - Salesforce.com
Post by: rimm_never_sleeps on November 01, 2012, 10:36:26 AM
unless it's a fraud they aren't facing any kind of cash crunch. they produce free cash flow and have over $1b of net cash on the balance sheet. so if your thesis is they have a cash crunch I don't see it. having said that I believe it's overvalued as a business. But as long as we keep printing money I don't really see a catalyst. overvaluation can be it's own catalyst, however. For shorts I would look closely at the recent list of tech and "cloud" IPOs.
Title: Re: CRM - Salesforce.com
Post by: HJ on November 01, 2012, 05:30:32 PM
unless it's a fraud they aren't facing any kind of cash crunch. they produce free cash flow and have over $1b of net cash on the balance sheet. so if your thesis is they have a cash crunch I don't see it. having said that I believe it's overvalued as a business. But as long as we keep printing money I don't really see a catalyst. overvaluation can be it's own catalyst, however. For shorts I would look closely at the recent list of tech and "cloud" IPOs.

Half of that $1 billion is already out of the door to the former owners of Buddy Media.  Deal hasn't closed yet, and they are already talking about layoffs?  The short side of the story is never about them being a fraud or running into a cash crunch, but the sustainability and limit of their growth.  At 7x revenue, you are either looking for meaningful profitability coming into view with some growth, or 30% + top line growth as far as eyes can see.  If just defined within CRM applications, they may well be already bumping up against the limit.  Their market cap already exceeds what Oracle paid for Sieble and Peoplesoft combined by a factor of almost 2.  As for revenue potential, their current run rate at $3 billion annual compared with Sieble's run-rate of $1.3 billion and Peoplesoft's run-rate of $2.2 billion, the last year of both of their public market existence.  And new competitors like SugarCRM are coming on line.  It just takes those guys a while to gather momentum.  So how far can CRM alone take you?

In order to support essentially a VC multiple, but at $20 billion market cap, they talked about brand new space.  The Marketing Cloud, aka Radian 6 integrated with Buddy Media was going to be the next billion dollar business down the road.   With news of the lay off, and FB IPO flop, that road seem to be just a bit longer than they originally planned.  But they need the marketing cloud story to keep the hope of infinite revenue growth alive.  Of course none of this is to say they will collapse with in the next quarter or 2, but to me, the news of the lay off seem to be a bit more important than the market seem to give it credit for. 

I actually wouldn't necessarily short the recent crop of Cloud IPO's except maybe to play a bit of lock up expiration game.  It's one thing to use some imagination to support a $5 billion market cap, $20 billion is an experiment of an entirely different magnitude.
Title: Re: CRM - Salesforce.com
Post by: RandFund on November 09, 2012, 07:58:34 AM
Interesting discussion on CRM here.  I'll share some thoughts as a former insider.  I was quite surprised to hear about the layoffs because this goes against a very strong culture of high growth.  I'm referring to an internal headcount growth imperative, where we actually received cash bonuses for hitting recruiting targets.  My former colleagues are telling me that the layoff was due to overlap and duplication resulting from the acquisitions of Radian6 and Buddy.  That seems to be the accepted reason internally, and seems plausible to me, especially in context of the continuing hiring blitz.  (The main hiring focus is sales.)

It's also interesting to read musings here and on Seeking Alpha about insider selling and the prospect of suspicious accounting or outright fraud.  From my perspective, the share and option grants seem to be treated by most employee beneficiaries much like base pay or commissions.  Selling upon vesting is essentially automatic behaviour for many (if not most) employees from what I can tell.  Personally, I would caution about reading too much into this.  As for the company's honesty and accounting practices, my impression has always been and continues to be that the senior leadership (CEO and CFO in particular) are highly ethical and make sincere efforts to be transparent.  You can agree or disagree with their focus on non-GAAP earnings (I happen to disagree), but I believe they present the information factually.

While I think the company and its products are outstanding, I have tremendous difficulty with the valuation.  I am also wary of the high percentage of stock held by institutions and founders.  As a result, I am neither long nor short, and will wait on the sidelines as a spectator until one of two things happen:  GAAP earnings return and accelerate, or the shorts finally take hold and send the price down.  (It might be difficult to jump in, but we'll see.)

I think the fundamental question is:  can Salesforce.com flip a switch and rapidly become profitable enough to justify its current valuation and more?  And if you believe the answer is yes, how long can you wait until the company feels they have sufficient market share to cut their sales and marketing expenses and focus on the smaller task of renewing subscriptions rather than signing up new accounts?

I hope this helps some of you in your due diligence.
Title: Re: CRM - Salesforce.com
Post by: nkp007 on November 20, 2012, 01:03:04 PM
Earnings come out soon. I doubt it'll be a surprise either way, but I'm still holding a large short position hoping that the valuation one day comes back in line with reasonable standards.
Title: Re: CRM - Salesforce.com
Post by: Cardboard on November 20, 2012, 01:10:18 PM
Well, I hope you are right man and that someday some sense of valuation will come back to some of these crazy stocks. I am short AMZN too and that piece of crap jumped the next day following a major earnings (well losses) and sales miss! Earnings matter eventually, they always do. And sales growth always slow down eventually. Just tough to say when.

Cardboard
Title: Re: CRM - Salesforce.com
Post by: ShahKhezri on November 20, 2012, 01:19:45 PM
I'm short both as well.  I've been involved in CMG, NFLX as well...I always covered after first drop.  These two will have their day too.
Title: Re: CRM - Salesforce.com
Post by: Cardboard on November 20, 2012, 02:52:38 PM
Tomorrow or in the next few days, you will see investment banks: "initiating" coverage of Salesforce.com as outperform with really high price targets. Always like that. It seems to me that no one with any clout should be initiating coverage anymore of a $20 billion market cap. It would be really like nice to do a study someday on these "initiations" to see who, why, when and how long the coverage was dropped? These new "supporters" sure excite people and the computers.

Anyway, listening to the call now. Benioff is the most annoying and arrogant CEO that I have ever heard. Painful...

Cardboard
Title: Re: CRM - Salesforce.com
Post by: ItsAValueTrap on November 20, 2012, 08:06:10 PM
There is probably an academic study that looks at analyst recommendations.  Basically... you should do the opposite.

The following is a really good book on why analysts make bad recommendations... usually it's to win investment banking business:
http://www.amazon.com/Confessions-Wall-Street-Analyst-Information/dp/0060747706

(If you want to help this site, purchase the book through this website's affiliate link.)

I'm not sure how much business Salesforce will generate for investment bankers though.
Title: Re: CRM - Salesforce.com
Post by: Cardboard on November 21, 2012, 06:18:13 AM
"I'm not sure how much business Salesforce will generate for investment bankers though."

10's of millions. Much more than the traditional underwriting fees for issuing new shares. It is all about writing expensive puts and calls that keep expiring worthless. There was some press on this about 2 years ago about some stocks closing exactly at the best prices on expiration to create the maximum pain for option buyers.

When you have a hyped stock where it becomes difficult for rational buyers (value, GARP) to assign a proper price that is when their game is at their best and where the analysts become very useful with their all aligned price targets and recommendations. It does not work forever. It stops when the company naturally shows sign of fatigue. However, I am sure that the temptation is too hard to resist and that many of them are very late to leave the musical chair game. Just like what we have seen with the housing bubble. Very few got out ahead of time since the fees kept pooring in and justifying big bonuses.

Cardboard
Title: Re: CRM - Salesforce.com
Post by: nkp007 on December 20, 2012, 11:30:14 AM
I may be an idiot, but I have increased my short position significantly. Approximately 20% of my fund.
Title: Re: CRM - Salesforce.com
Post by: rimm_never_sleeps on December 20, 2012, 11:59:11 AM
I may be an idiot, but I have increased my short position significantly. Approximately 20% of my fund.

can you update on the latest? thanks.
Title: Re: CRM - Salesforce.com
Post by: nkp007 on December 20, 2012, 12:12:18 PM
I may be an idiot, but I have increased my short position significantly. Approximately 20% of my fund.

can you update on the latest? thanks.

Same as before, price is now much higher.

I think $CRM is a legitimate company that offers some great services, but I don't see them having a long-term competitive advantage as evidenced by their lack of pricing power. They have a low-teens attrition rate and their main basis for compensation / aquisitions (a high stock price) is tenuous.

There is a place for them in the cloud computing world, but not at their current market valuation. On a GAAP basis, they will be unprofitable for the foreseeable future.
Title: Re: CRM - Salesforce.com
Post by: obtuse_investor on December 20, 2012, 12:37:15 PM
I may be an idiot, but I have increased my short position significantly. Approximately 20% of my fund.

I lost a little bit of cash shorting CRM.

One thing I learned from a speech from Jim Chanos--- never ever short something purely because of valuation.

I realize that there are other issues with CRM's financial statements, but market has the ability to ignore these indefinitely.

Title: Re: CRM - Salesforce.com
Post by: nkp007 on December 20, 2012, 12:39:06 PM
I may be an idiot, but I have increased my short position significantly. Approximately 20% of my fund.

I lost a little bit of cash shorting CRM.

One thing I learned from a speech from Jim Chanos--- never ever short something purely because of valuation.

I realize that there are other issues with CRM's financial statements, but market has the ability to ignore these indefinitely.

Good point.
Title: Re: CRM - Salesforce.com
Post by: muscleman on December 20, 2012, 05:05:36 PM
unless it's a fraud they aren't facing any kind of cash crunch. they produce free cash flow and have over $1b of net cash on the balance sheet. so if your thesis is they have a cash crunch I don't see it. having said that I believe it's overvalued as a business. But as long as we keep printing money I don't really see a catalyst. overvaluation can be it's own catalyst, however. For shorts I would look closely at the recent list of tech and "cloud" IPOs.

I haven't been tracking this since a year ago, but last time when I looked at it, the free cash flow come completely from liquidation of the inventory and account receivables from acquisitions
Title: Re: CRM - Salesforce.com
Post by: HJ on December 20, 2012, 08:10:40 PM
http://allthingsd.com/20121220/salesforce-may-go-shopping-in-response-to-oracle-deal/?reflink=ATD_yahoo_ticker

The way I see it, to short this stock, you almost have to get into the psyche of the current stock holders of CRM.  I think the only thing that'll make them sell is revenue deceleration, or liquidity issue which is not about to happen anytime soon unless they spend even more aggressively to buy more companies.  They did 50% revenue growth this fiscal year, and are forecasting 25-30% next year.  I think everything rests on this "marketing cloud", whether it will be able to reaccelerate their revenue growth or not, and we'll probably have better ideas of this by the middle of next year.   

None of this has anything to do with investing the way that's understood by most people, but you gotta play their game if you want to borrow their stock.
Title: Re: CRM - Salesforce.com
Post by: ItsAValueTrap on December 21, 2012, 10:19:01 AM
Do any of you think that the underlying business is no longer as excellent as it once was?

Here is one review of salesforce:
Quote
http://www.epinions.com/review/inet-ASPs-All-Salesforce_com/content_580011986564
"Was decent but has gone way down hill in late '11-'12. Don't buy! "
"Our company started using Salesforce in 2009 and the service was not great, but you could get someone to call you back when you had questions, even if they didn't speak English well, and eventually you could be put through to someone who could help.
Since that time the service has become pretty much non-existent."

--------------
I own 1 put option.  This doesn't feel like a great short.  They aren't bleeding money so that won't be an impending catalyst.

They have huge amounts of cash coming in due to the stock-based compensation.  The product is pretty good too from what I can tell.  I guess for my put option to work out ($100 strike, jan 2015) salesforce's CEO has to take his eye off the ball and let the underlying business deteriorate.  It seems that they are experiencing growing pains from an aggressive sales force signing up new clients... support that gets back to you in 2 business days is just ridiculous.

More balanced reviews/discussions here:
http://www.linkedin.com/answers/marketing-sales/advertising-promotion/internet-marketing/MAR_ADP_INM/581448-7718044

http://forums.whirlpool.net.au/archive/1888637
Title: Re: CRM - Salesforce.com
Post by: Hoodlum on January 25, 2013, 05:16:44 PM
Look like a 1 to 4 stock split is coming and also some interesting comments regarding the reasons for the split.  Somehow this will make the company stock more attractive to employees. ::)  This might make it more attractive for me to short in the coming months.  CRM already up $5 after hours.

http://www.forbes.com/sites/ericsavitz/2013/01/25/salesforce-com-making-plans-for-4-for-1-stock-split/?partner=yahootix

The Board believes that this considerable price appreciation, and the associated reduction in number of shares of stock covered by equity awards we issue to newly hired and existing employees, has reduced the perceived attractiveness of our employee equity awards.”
Title: Re: CRM - Salesforce.com
Post by: GrizzlyRock on January 25, 2013, 08:28:19 PM
Ok here's my take.  The shorts are looking at traditional valuation metrics while all the bulls can see is the revenue growth. So If you are short - here is a powerful catalyst.  Miitigation of sales growth figures.  When is that going to happen? Perhaps with the next earnings this February.

Why?  Because of the change in focus last year.  By my calculations Benoiff started signing uneconomic long-term contracts last year simply to boost deferred revenue.  Here is my analysis: http://www.grizzlyrockcapital.com/Salesforce.com_New_Business_Calcs.xlsx  Look at the changes in the quarter ended 1/31/12 (column S)

Another piece the bears will like is here (BTW this guy is 19 - what were you doing at 19?): http://valueinvestingletter.com/7-questions-for-salesforce.com-ceo-marc-benioff-from-a-prospective-shareholder.html?utm_source=VIL&utm_medium=E&utm_content=article_7-questions-for-salesforce-ceo-marc-benioff-from-a-prospective-shareholder&utm_campaign=Jan2013Issue&offer=Jan2013Issue

I'm not going to post any more on the public thread - hit me up offline if you want to discuss.  -Kyle
 
Title: Re: CRM - Salesforce.com
Post by: enoch01 on January 26, 2013, 06:25:47 AM
When the stock goes up it helps cash come in the door.  Is the split a small sign of desperation?
Title: Re: CRM - Salesforce.com
Post by: nkp007 on January 28, 2013, 06:20:12 AM
I wonder if they're splitting the shares to make non-gaap loss per share look better on an absolute basis.
Title: Re: CRM - Salesforce.com
Post by: bobp on January 28, 2013, 06:36:47 AM
"the associated reduction in number of shares of stock covered by equity awards we issue to newly hired and existing employees, has reduced the perceived attractiveness of our employee equity awards.”

Translation? Employees and potential hires are getting leery of compensation in overpriced stock and we're hoping to fool them with a stock split.
Or maybe I'm just looking for negatives.
Title: Re: CRM - Salesforce.com
Post by: VAL9000 on January 28, 2013, 07:37:05 AM
"the associated reduction in number of shares of stock covered by equity awards we issue to newly hired and existing employees, has reduced the perceived attractiveness of our employee equity awards.”

Translation? Employees and potential hires are getting leery of compensation in overpriced stock and we're hoping to fool them with a stock split.
Or maybe I'm just looking for negatives.

Translation: Employees perceive 400 share options at $50 as more appealing than 100 share options at $200.

Translation: Our employees can't math.
Title: Re: CRM - Salesforce.com
Post by: ItsAValueTrap on January 28, 2013, 11:36:10 AM
It has a slight advantage to small retail investors if it helps them avoid odd lot orders.  Odd lots (in CRM's case I think it would be orders not divisible by 100) would receive inferior order execution if they are posted to an exchange.

The big picture is that a stock split is pretty irrelevant in the grand scheme of things.  Usually it makes sense to focus on the things that matter: the economics of the business, management, valuation, etc.
Title: Re: CRM - Salesforce.com
Post by: writser on January 28, 2013, 11:53:33 AM
One of the reasons they do it is probably psychologic. The stock is already overvalued but at $175 it also looks expensive! Not good for your huge option position.
Title: Re: CRM - Salesforce.com
Post by: Cardboard on March 04, 2013, 08:41:51 AM
Their forecast for FY 2014 assumes $503 million in stock options expense against revenues of $3.85 billion. That is 13% of revenues in expenses that they will exclude from their non-GAAP earnings. It was 10% in FY 2012 and 13% in FY 2013. Even after excluding half a billion dollar in expense, they will still trade at 90 some times of the current price...

Forecasted revenue growth remains strong at 26%, but declining and I noticed that cash flow has not kept pace lately with revenue growth and there is a growing interest in all kinds of deferred revenues. I have also heard different stories about difficulties in the implementation of their software and lack of customer service which sounds quite different than the fairy tale that we hear from Benioff.

I wonder when Wall Street will stop subsidizing unprofitable enterprises or at least pay rational multiples which include some form of skepticism.

Cardboard
Title: Re: CRM - Salesforce.com
Post by: ItsAValueTrap on March 04, 2013, 03:56:17 PM
I'm also short this thing (put option) but I'm doubting myself.

Quote
Their forecast for FY 2014 assumes $503 million in stock options expense against revenues of $3.85 billion. That is 13% of revenues in expenses that they will exclude from their non-GAAP earnings.
They are smart.

Quote
I have also heard different stories about difficulties in the implementation of their software and lack of customer service
CRM software in general is complicated.  That's why there are professionals which office services in implementing it.

While their customer service may be mediocre (the result of trying to grow at warpspeed?)... a lot of users really like their software.  Their software is in a top tier if you compare it to all the other CRM products out there.  Somehow they managed to stop reporting GAAP profits... so you could take that as a bad sign.

The multiple is ridiculous though.

Quote
Forecasted revenue growth remains strong at 26%, but declining
A decline in revenues is arguably normal.  You can't go past 100% market share.  At some point it has to slow down right?
Title: Re: CRM - Salesforce.com
Post by: wellmont on March 04, 2013, 05:30:33 PM
One of the reasons they do it is probably psychologic. The stock is already overvalued but at $175 it also looks expensive! Not good for your huge option position.

exactly. it's designed to make it more attractive to the uninitiated, who are really the only ones who would buy it at these levels.
Title: Re: CRM - Salesforce.com
Post by: Phaceliacapital on March 07, 2013, 12:50:55 AM
I looked through the numbers and despite the enthousiasm at the beginning of this thread I am a little bit cautious...

I mean, without a doubt, once it starts melting it will melt pretty quickly, the million dollar question is ... drums .... when?

You would think that investors shiver when they hear non-us gaap, sole focus on revenue etc but this does not seem to be the case. With every earnings call you suspect that the negative feedback loop will start, unfortunately up till now we have only been disappointed.

And maybe with regards to my comment above, how far would it actually melt? 50, 60, 80? Would an Oracle/IBM or other giant devour CRM at this price?

What are best case scenario's? Can they really go to 10 bn in sales??

How are you guys playing this? The 2014/2015 options?
Title: Re: CRM - Salesforce.com
Post by: Phaceliacapital on March 07, 2013, 12:54:21 AM
And also, for your entertainment, a CRM version of "Where is Waldo", can you spot the earnings?

(http://s14.postimage.org/yv9le2vn5/CRM_wordcloud.png)

Generated from their last "earnings" call
Title: Re: CRM - Salesforce.com
Post by: Sunrider on March 07, 2013, 03:08:08 AM
what tool did you use to generate this? Seems like a good thing to do on all sorts of calls to get a very quick overview and perhaps find somethings to probe deeper (indicated as significant by their absence).

Cheers - Christian
Title: Re: CRM - Salesforce.com
Post by: Phaceliacapital on March 07, 2013, 03:32:15 AM
And maybe with regards to my comment above, how far would it actually melt? 50, 60, 80? Would an Oracle/IBM or other giant devour CRM at this price?

Is there an implied Oracle Put?

(http://i46.tinypic.com/vhzvrm.jpg)


what tool did you use to generate this? Seems like a good thing to do on all sorts of calls to get a very quick overview and perhaps find somethings to probe deeper (indicated as significant by their absence).

Cheers - Christian

http://tagcrowd.com/
Title: Re: CRM - Salesforce.com
Post by: Sunrider on March 07, 2013, 05:24:14 AM
thanks.
Title: Re: CRM - Salesforce.com
Post by: writser on March 07, 2013, 01:50:47 PM
Never heard of "tag crowds" but I really like the concept. Probably most interesting are the terms missing in the cloud. Where are "expenses", "value", "rational" and "facts"?
Title: Re: CRM - Salesforce.com
Post by: Phaceliacapital on March 12, 2013, 02:03:19 AM
Quote
By Tiernan Ray
Shares of cloud computing software vendor Salesforce.com (CRM) are down 35 cents at $185.59 after the company this afternoon said it will issue $1 billion of convertible senior unsecured, unsubordinated notes, due 2018, in a private placement.

The company said that it expects to engage in hedge transactions with one or more purchasers, and warrant transactions, that will “reduce the potential dilution to salesforce.com’s common stock upon the conversion of the notes.”

After the cost of the hedges, the remaining proceeds will be used “for general corporate purposes,” including acquisitions and other things

...
Title: Re: CRM - Salesforce.com
Post by: fedcep on March 14, 2013, 10:32:46 PM
I assume you guys also noticed that they extended their revenue recognition term from "12 to 24" to "12 to 36" months in the risk factors of the latest 10-K, and revenue recognition keeps getting more and more aggressive.

They also state that they "have received a notice from a large non-practicing entity alleging that we infringe upon certain of its patents". Does anyone have any more intel on this? This could be an interesting new catalyst for revenue growth slowdown.

Thanks in advance.
Title: Re: CRM - Salesforce.com
Post by: Phaceliacapital on March 15, 2013, 03:13:59 AM
Not yet, but looking into it.

They also dropped "leading" whenever they describe themselves :D
Title: Re: CRM - Salesforce.com
Post by: nkp007 on March 15, 2013, 09:04:27 AM
Anyone thinking of shorting via selling calls?

I've never done it before so I'd love to learn.
Title: Re: CRM - Salesforce.com
Post by: fedcep on March 15, 2013, 09:23:10 AM
I wouldn't sell calls, implied vol is very low, and you'd be short gamma.
Title: Re: CRM - Salesforce.com
Post by: Olmsted on March 15, 2013, 10:08:34 AM
They also state that they "have received a notice from a large non-practicing entity alleging that we infringe upon certain of its patents". Does anyone have any more intel on this? This could be an interesting new catalyst for revenue growth slowdown.

The phrasing, which specifically includeds "non-practicing entity", sounds like a patent troll to me, no?  If that's the case, they're probably looking for a quick payoff then they'll be gone.  Probably not much of a negative catalyst.

But I know nothing besides the filing.
Title: Re: CRM - Salesforce.com
Post by: rukawa on April 12, 2013, 09:00:05 AM
Quote
I wouldn't sell calls, implied vol is very low, and you'd be short gamma.

Than it makes sense to buy puts. Didn't know imp vol was low. Thought it would be extremely high.
Title: Re: CRM - Salesforce.com
Post by: Phaceliacapital on April 18, 2013, 02:18:38 PM
Quote
SAN FRANCISCO,  March 21, 2013  /PRNewswire/ -- Salesforce.com (NYSE: CRM), the
enterprise cloud computing (http://www.salesforce.com/cloudcomputing/) company,
announced today that its Board of Directors has approved a four-for-one (4:1)
split of the Company's common stock and that its stockholders have approved a
proportional increase in the number of authorized shares of salesforce.com
common stock from 400 million to 1.6 billion. 

And comments from our """investment guru""" Jim Cramer :D :

Quote
So what's changed? I think Salesforce.com's $170 stock is simply too treacherous to own, not because of how the company's doing, which is fabulously, but because of how poorly the security trades.

Yes, it is a reason that investors should no longer fear an unpredictable stock of what has become a very predictable company

Lol

I am still short with 2014 puts
Title: Re: CRM - Salesforce.com
Post by: fedcep on May 04, 2013, 02:36:03 PM
Quote
I wouldn't sell calls, implied vol is very low, and you'd be short gamma.

Than it makes sense to buy puts. Didn't know imp vol was low. Thought it would be extremely high.

Sorry, just saw this. I agree. That's the position I have on.
Title: Re: CRM - Salesforce.com
Post by: GrizzlyRock on May 24, 2013, 07:28:44 AM
The slowing revenue guidance is emblematic of penetration and and growing competition (regardless of Benioff's assertion of their Gartner position as proof) may begin to cause guys to look at the true valuation metrics of the biz. When trading on revenue growth at any cost is over, its still up to CRM to transition the rev growth to earnings and free cash flow. I thought the cash generation was actually reasonable (something to watch anyways) but knowing Benioff he'll overpay for an acquisition shortly. Earnings continue to be dismal especially when you factor in stock comp.

"I don't get it - how can Salesforce not be worth more that 100x fake Non-GAAP earnings guidance ?!!?"
- Silicon Valley's Finest

Definitely not the "emperor has no clothes!" moment on Salesforce but we'll have to see how the sell side guys react.

CEO Benioff = Chearleading Exiting-stock Over-optimist!

I'll blame Friday for the punchy post.
Title: Re: CRM - Salesforce.com
Post by: nkp007 on May 24, 2013, 07:34:29 AM
The slowing revenue guidance is emblematic of penetration and and growing competition (regardless of Benioff's assertion of their Gartner position as proof) may begin to cause guys to look at the true valuation metrics of the biz. When trading on revenue growth at any cost is over, its still up to CRM to transition the rev growth to earnings and free cash flow. I thought the cash generation was actually reasonable (something to watch anyways) but knowing Benioff he'll overpay for an acquisition shortly. Earnings continue to be dismal especially when you factor in stock comp.

"I don't get it - how can Salesforce not be worth more that 100x fake Non-GAAP earnings guidance ?!!?"
- Silicon Valley's Finest

Definitely not the "emperor has no clothes!" moment on Salesforce but we'll have to see how the sell side guys react.

CEO Benioff = Chearleading Exiting-stock Over-optimist!

I'll blame Friday for the punchy post.

I wish there were an asymmetric way to short this.
Title: Re: CRM - Salesforce.com
Post by: ItsAValueTrap on May 24, 2013, 08:17:20 AM
Um.... put options?
Title: Re: CRM - Salesforce.com
Post by: Phaceliacapital on June 05, 2013, 03:56:55 AM
http://seekingalpha.com/instablog/818827-brooklynvestor/1923281-marc-benioff-s-incredible-story?source=kizur
Title: Re: CRM - Salesforce.com
Post by: Olmsted on June 05, 2013, 12:11:23 PM
http://seekingalpha.com/instablog/818827-brooklynvestor/1923281-marc-benioff-s-incredible-story?source=kizur

Haha classic.
Title: Re: CRM - Salesforce.com
Post by: valueInv on July 15, 2013, 04:32:43 PM
Boy o Boy:

http://techcrunch.com/2013/07/15/salesforce-com-takes-300m-loan-for-exacttarget-acquisition-cash-resources-getting-tight
Title: Re: CRM - Salesforce.com
Post by: ItsAValueTrap on October 02, 2013, 07:24:52 AM
So CRM is making record highs yet again.  Anybody buying puts?

On one hand, the valuation seems extreme on a price to sales ratio.  31B market cap for 3B in sales.  Of course, it's about what salesforce will earn a few or several years from now.

On the other hand, this doesn't seem like a great short.  The stock probably won't go to 0, and if it does collapse it might be a few or several years from now so your IRR isn't that great even if the short thesis does work out.
Title: Re: CRM - Salesforce.com
Post by: Phaceliacapital on October 02, 2013, 07:39:20 AM
I didn't add to my existing 2014 position, I agree with your remarks and expect my puts to expire otm, although the valuation is really out of this world
Title: Re: CRM - Salesforce.com
Post by: enoch01 on October 02, 2013, 07:54:58 AM
So CRM is making record highs yet again.  Anybody buying puts?

On one hand, the valuation seems extreme on a price to sales ratio.  31B market cap for 3B in sales.  Of course, it's about what salesforce will earn a few or several years from now.

On the other hand, this doesn't seem like a great short.  The stock probably won't go to 0, and if it does collapse it might be a few or several years from now so your IRR isn't that great even if the short thesis does work out.

To me it seems like more and more people are saying its not a great short in spite of all its "issues".  I take this to mean the time to go short is getting closer.  But each time I checked it has been too expensive to short it for my taste.
Title: Re: CRM - Salesforce.com
Post by: jschembs on October 02, 2013, 08:32:22 AM
Can someone point me to a $3+ billion revenue business with 80% gross margins that can't generate operating profits?

Look at ORCL, SAP, and MSFT in their high growth phases - each were generating substantial operating margins in those periods.

Something doesn't add up for me vis-a-vis CRM. Anyone with a forensic accounting bent know how easy it would be for a company to book sales discounts as marketing expenses and drop those down from either a contra revenue account or COGS into operating expenses? That's one explanation in my mind that carries weight as to how CRM can generate such substantial revenue at high gross margins while not generating operating profits. Benioff is so focused on top line growth that it wouldn't surprise me if they bent the rules to maintain gross revenue targets.

Benioff touts the wonderful opportunities ahead for the marketing cloud and their "platform," yet they do not break revenue out by segment, which leads me to believe they're largely still a one-trick CRM pony. CRM software is highly competitive, and the SAAS model IMO is much more subject to disruption by competitive software offerings, as the implementation/switching costs are so much lower than traditional on-premise software. Competition is growing in their core SAAS CRM market as well, with Goldman recently investing in Sugar CRM (which was also adopted by IBM as their CRM platform).

Short CRM is my largest position currently, so my views need to be taken with a grain of salt. I've attached, however, a thorough dive into CRM's ROIC from Cowen, which shows a business consistently generating returns fall below their cost of capital. I must say I was shocked to see this type of analytical work from a sell-side report.
Title: Re: CRM - Salesforce.com
Post by: wellmont on October 02, 2013, 09:10:24 AM
i think it's going to be a great short someday. but not with me trying to do it while massive global money printing going on.
Title: Re: CRM - Salesforce.com
Post by: Hoodlum on October 02, 2013, 09:25:47 AM
I have been monitoring CRM as a possible short for a couple of months.  I shorted them a couple of years ago with some nice profit.  Still not in yet this time around but monitoring it closely.

Most of the recent upswing is related to new revenue from their recent puchase of ExactTarget ($2.5B all in cash).  What I find interesting is that their last purchase required debt financing so even their target companies don't want their stock.  Organic growth is slowing and it will become more difficult to finance future aquisitions to keep the growth story going.  Their expenses are still rising faster than revenue with increased marketing and debt costs.  Their employee stock options will be over 10% of equity this year.
Title: Re: CRM - Salesforce.com
Post by: nkp007 on October 02, 2013, 09:40:23 AM
This company has turned me off to shorting. Lots of lessons learned.

I still believe it's worth far, far less. Public markets will eventually agree.
Title: Re: CRM - Salesforce.com
Post by: writser on October 02, 2013, 10:55:55 AM
Short CRM is my largest position currently, so my views need to be taken with a grain of salt. I've attached, however, a thorough dive into CRM's ROIC from Cowen, which shows a business consistently generating returns fall below their cost of capital. I must say I was shocked to see this type of analytical work from a sell-side report.

Your largest position or your largest short position? I'm short a couple of hyped tech stocks as well, but keep the positions very small. Wouldn't dare putting 10% of my portfolio in a CRM short.  These positions tend to explode.
Title: Re: CRM - Salesforce.com
Post by: ItsAValueTrap on October 02, 2013, 11:29:28 AM
Quote
Can someone point me to a $3+ billion revenue business with 80% gross margins that can't generate operating profits?
While this doesn't answer your question directly, some tech companies do manage to make huge gains despite looking expensive.  Paypal (taken over by eBay) and Vmware (when vmware was purchased by EMC) are some examples.  The CRM product is legitimately a very good product (arguably the best in its field) so I'm not excited about shorting CRM.

Quote
as the implementation/switching costs are so much lower than traditional on-premise software
I don't think it makes a huge difference whether it's SaaS or traditional.

Switching costs are somewhat high since these CRM products are complicated and often require specialists or consultants to install and integrate the software with the company's other software and the company's business practices.  There is a huge learning curve for employees to get familiar with the new software.

What we're really concerned about is (A) whether Salesforce is gaining or losing customers and (B) how well it is retaining its existing customers. 

*I am short CRM (via put options)
Title: Re: CRM - Salesforce.com
Post by: jschembs on October 02, 2013, 11:53:05 AM
VMW is a great comp, growing at similar rates in the same era. Since FY2004 (one month difference in fiscal year ends):

VMW's EBIT margin has averaged 18% (high of 24.2% in 2005, low of 10.8% in 2009) while growing revenue from $220 MM in 2004 to $4.6 BN in 2012 (46% CAGR)

CRM's EBIT margin has averaged 3.5% (high of 8.8% in 2010, low of -1.5% last year) while growing revenue from $176 MM in 2004 to $3.1 BN in 2012 (43% CAGR)

My argument here isn't that CRM is a valuation short (which it certainly is, but that's another discussion, I think there's a fundamental problem with their business model.
Title: Re: CRM - Salesforce.com
Post by: VAL9000 on October 02, 2013, 11:55:19 AM
Quote
Can someone point me to a $3+ billion revenue business with 80% gross margins that can't generate operating profits?
While this doesn't answer your question directly, some tech companies do manage to make huge gains despite looking expensive.  Paypal (taken over by eBay) and Vmware (when vmware was purchased by EMC) are some examples.  The CRM product is legitimately a very good product (arguably the best in its field) so I'm not excited about shorting CRM.

Quote
as the implementation/switching costs are so much lower than traditional on-premise software
I don't think it makes a huge difference whether it's SaaS or traditional.

Switching costs are somewhat high since these CRM products are complicated and often require specialists or consultants to install and integrate the software with the company's other software and the company's business practices.  There is a huge learning curve for employees to get familiar with the new software.

What we're really concerned about is (A) whether Salesforce is gaining or losing customers and (B) how well it is retaining its existing customers. 

*I am short CRM (via put options)

The switching costs are higher for SalesForce but not because of the implementation effort.  It's because the platform allows for integrated products to be built that extend from the CRM core solution. Now instead of replacing just CRM you have to replace both CRM and Marketing Automation (assuming you adopt both as a customer).  Presumably all of the significant acquisitions that SalesForce makes are integrated into the common cloud platform.   This is a competitive advantage over because the integration costs are much more competitive than those for Vendor A CRM + Vendor B Marketing Automation.

My value investor rationale says this is a good short but my entrepreneurial gut says don't bet against a winner.  A question for the shorts: how many customers are leaving SalesForce in the face of this competition?  Or another way to ask this is...  Are these contracts annuities... Or perpetuities?

Good luck to all I will continue to observe.
Title: Re: CRM - Salesforce.com
Post by: GrizzlyRock on October 02, 2013, 04:28:16 PM
Let's invert: the longs are looking at quality SAAS business model, consistent revenue growth, market share in a fairly sticky product business, 1st mover advantage in CRM software, and the ability of Salesforce.com to reduce their selling expenses (currently ~40% of revenue) in the future and thus generate FCF.

CRM as a business was exceptional  being the first to put forth a solid CRM system via SAAS model (thus in terms of driving a high EBITDA multiple and high customer retention).  So the underlying product is useful to customers and sticky.  This is true. 

The question is FCF generation.  When a dominant software company (say ORCL or MSFT) dominates their industry they begin gushing cash. Yet we haven't seen this with CRM even though much of their (bloated) sales staff is paid in "free money" equity.  Why is that?  Why can't CRM generate cash?  Oracle trades at 11x unlevered FCF, MSFT trades at 11.5x unlevered cash flow while CRM trades at 38x unlevered FCF. Is CRM's growth curve that emphatic with the big dog enterprise software players getting into the market?

The shorts are looking at unsustainable growth rate of revenue growth, questionable accounting, management selling stock hand over fist, low ROIC.  Said another way: In an upside case CRM will do ~$1.2 billion in FCF in FY2015, thus its trading at~25x FCF or a 4% FCF yield in an upside case?  Does this makes sense?
Title: Re: CRM - Salesforce.com
Post by: ItsAValueTrap on October 02, 2013, 04:49:29 PM
Maybe I am crazy but I don't think that SaaS is that important.  SaaS has been around for a while and I think it's overhyped.

Look at email software:
Hotmail - SaaS
Gmail - SaaS
Outlook - Traditional application

Because the Internet is more prevalent nowadays, SaaS is more viable and widespread than in the past.  But I don't think it makes such a big difference to a product's competitiveness.  Both approaches seem to be valid and legitimate for the same product niches.  (Obviously there are technical advantages to both approaches.)

Though at the end of the day, I think that most of us would agree that Salesforce has very, very good software.
Title: Re: CRM - Salesforce.com
Post by: VAL9000 on October 02, 2013, 04:59:19 PM
The question is FCF generation.  When a dominant software company (say ORCL or MSFT) dominates their industry they begin gushing cash. Yet we haven't seen this with CRM even though much of their (bloated) sales staff is paid in "free money" equity.  Why is that?  Why can't CRM generate cash?  Oracle trades at 11x unlevered FCF, MSFT trades at 11.5x unlevered cash flow while CRM trades at 38x unlevered FCF. Is CRM's growth curve that emphatic with the big dog enterprise software players getting into the market?

Well if you want to compare CRM to MSFT or ORCL then you need to compare all of the metrics.
MSFT puts 26% of revenue to SG&A, growth rate ~ 8% per annum (past 3 years)
ORCL puts 24% of revenue to SG&A, growth rate ~ 12% per annum (past 3 years)
CRM puts 69% of revenue to SG&A, growth rate ~ 33% per annum (past 3 years)
CRM gets a bit more juice for its investment, but that's alright.

Let's plug those numbers back in to the FCF figure.  If you assume CRM invests just 25% of revenue in sales, they would add ~900mm in after-tax net income, which presumably would stack right on top of current FCF.  That brings the FCF multiple to 18x.

Is CRM's cash flow generation worth ~60% more than MSFT and ORCL?  It's not that far off the mark if you consider the subscription model vs. the software license model.
Title: Re: CRM - Salesforce.com
Post by: jschembs on October 10, 2013, 11:34:24 AM
Chanos discloses a long WDAY position as a hedge against an unnamed cloud company that is an "accounting nightmare." He dodged the question a few weeks ago as to whether he was short CRM, but I strongly suspect that's it.
Title: Re: CRM - Salesforce.com
Post by: valueInv on October 10, 2013, 12:07:49 PM
Chanos discloses a long WDAY position as a hedge against an unnamed cloud company that is an "accounting nightmare." He dodged the question a few weeks ago as to whether he was short CRM, but I strongly suspect that's it.

Do you have a link to the accounting problems at crm?
Title: Re: CRM - Salesforce.com
Post by: jschembs on October 10, 2013, 12:20:42 PM
1. Persistent usage of non-GAAP financials in investor communications and PR
2. Substantial management judgment involved in purchase accounting related to acquisitions
3. Goodwill and intangible assets now comprise more than 55% of total assets
4. Operating cash flow largely comprised of share-based compensation and increasing operating liabilities
Title: Re: CRM - Salesforce.com
Post by: Palantir on October 10, 2013, 12:25:24 PM
Why are heavy amounts of deferred revenue and share compensation necessarily a problem? It seems these are hiding profitability more than vice versa.
Title: Re: CRM - Salesforce.com
Post by: jschembs on October 10, 2013, 12:28:12 PM
My point there is that operating cash flow growth is coming from unsustainable sources. Earnings quality as measured by net income as a proportion of operating cash flow is non-existent.
Title: Re: CRM - Salesforce.com
Post by: Hielko on October 27, 2013, 03:44:52 AM
pretty good article imo on CRM @ SA: http://seekingalpha.com/article/1776782-salesforce-com-the-underpants-gnomes-of-wall-street
Title: Re: CRM - Salesforce.com
Post by: jschembs on October 27, 2013, 05:55:34 AM
Thanks! I could have added a few more paragraphs of serious issues (15 years and effectively no retained earnings, increasing debt load, first convertible coming due next year), but I didn't want the article to get too unwieldy.
Title: Re: CRM - Salesforce.com
Post by: Hielko on October 27, 2013, 06:03:52 AM
Didn't realize you were the writer, but makes sense looking at your username :p. Nice job.
Title: Re: CRM - Salesforce.com
Post by: tombgrt on February 23, 2014, 12:16:32 AM
Did anyone read this article? It's a few months old so I'm probably late to the party. It's pretty funny.

http://valleywag.gawker.com/marc-benioff-is-the-ron-burgundy-of-tech-1469662002/all

Holy cow is that Benioff nuts!

And he's still at it with his 1-1-1 charity project it seems: https://twitter.com/Benioff/status/436703340945104896
Maybe he should go for 1% of revenue because other than employee hours the rest is quite shit!

Also like the regular complaints on his personal twitter feed. And what about the other ego boosting with celebs, fashion, ... Ha! https://twitter.com/Benioff

I really have a hard time not increasing my put option position when I read more of this nonsense but I understand the idiotic momentum that can continue in such stocks. At the least at the current price with $10b in revenue and 20%+ op. margins, the stock wouldn't be too severly overpriced. If we were already living in that time (2020?) that is... Not that I believe we'll actually ever see this scenario come to frution.
Title: Re: CRM - Salesforce.com
Post by: Vish_ram on February 23, 2014, 05:01:52 AM
Great post.

I'm in ERP and haven't used CRM products. No position in CRM.

1) The comparison to GOOG and MSFT in SA article is specious. The latter two are natural monopolies. CRM needs to get their foot in the door. CRM is not a monopoly and it has to fight tooth and nail to gain revenue.

2) How do you short a company that is growing revenue at several factors of GDP growth, doesn't issue much debt and generates operating cash flow to fund most of growth?

3) Once you embed a software in corporate world, it gets very hard to take it out. It took me 4 years to remove a piece of software from my company as that functionality was now provided by the main ERP. For a big CRM implementation that would spread tentacles (integration to back office etc) to other pieces of software in corp world, you can almost forget getting it removed. It is hard to get in, harder to get out.

4) In a way CRM is like AMZN. Some of the traditional metrics don't matter. What matters is revenue growth. FOr each $1 of revenue, they are keeping the competitors permanently at bay. Look at the growth of revenue per share for last 10 years.

The analogy that I've is that , CRM shareholders are owning the miracle tree that grows rapidly and generates a million seeds. The seeds are carried by wind near and far and they outsmart other seeds to grow in fresh virgin soil. The cycle repeats. The tree doesn't generate any fruits for now, but in the end, the owners of this tree will find a big area of land blanketed by this miracle tree. Once there is no more land left, the tree can stop producing seeds and start giving fruits.

The only troubling trend in CRM is the recent decline in ROIC. We need to see if this is one time blip or a permanent phenomenon. The short thesis precariously rests on this. A company doing lots of acquisitions will show more BV (through write up of Goodwill), so invested capital looks bigger (as opposed to spending on sales that is expensed). This might explain lower ROIC as well.

As economy expands, IT budgets go up and companies start ramping up software projects.
I would never short a growing software firm that is not issuing debt. Good luck to shorts, they need it in plenty.

Let's invert: the longs are looking at quality SAAS business model, consistent revenue growth, market share in a fairly sticky product business, 1st mover advantage in CRM software, and the ability of Salesforce.com to reduce their selling expenses (currently ~40% of revenue) in the future and thus generate FCF.

CRM as a business was exceptional  being the first to put forth a solid CRM system via SAAS model (thus in terms of driving a high EBITDA multiple and high customer retention).  So the underlying product is useful to customers and sticky.  This is true. 

The question is FCF generation.  When a dominant software company (say ORCL or MSFT) dominates their industry they begin gushing cash. Yet we haven't seen this with CRM even though much of their (bloated) sales staff is paid in "free money" equity.  Why is that?  Why can't CRM generate cash?  Oracle trades at 11x unlevered FCF, MSFT trades at 11.5x unlevered cash flow while CRM trades at 38x unlevered FCF. Is CRM's growth curve that emphatic with the big dog enterprise software players getting into the market?

The shorts are looking at unsustainable growth rate of revenue growth, questionable accounting, management selling stock hand over fist, low ROIC.  Said another way: In an upside case CRM will do ~$1.2 billion in FCF in FY2015, thus its trading at~25x FCF or a 4% FCF yield in an upside case?  Does this makes sense?
Title: Re: CRM - Salesforce.com
Post by: jschembs on February 23, 2014, 11:26:06 AM
At what point does sheer size start to weigh on the valuation? The company's 10.5x EV/revenue (recognizing EV/billings is better, but I'm pulling quick numbers from Cap IQ) is currently the same as it was in 2007, when it was generating roughly $500 MM in revenue (versus $4 BN today). As the company grows, each incremental percentage point of revenue growth is more difficult and expensive to achieve.
Title: Re: CRM - Salesforce.com
Post by: wellmont on February 23, 2014, 01:04:41 PM
this company is ridiculously overpriced and will come back to earth eventually.
Title: Re: CRM - Salesforce.com
Post by: tombgrt on February 23, 2014, 02:46:33 PM
Great post.

I'm in ERP and haven't used CRM products. No position in CRM.

1) The comparison to GOOG and MSFT in SA article is specious. The latter two are natural monopolies. CRM needs to get their foot in the door. CRM is not a monopoly and it has to fight tooth and nail to gain revenue.

2) How do you short a company that is growing revenue at several factors of GDP growth, doesn't issue much debt and generates operating cash flow to fund most of growth?

3) Once you embed a software in corporate world, it gets very hard to take it out. It took me 4 years to remove a piece of software from my company as that functionality was now provided by the main ERP. For a big CRM implementation that would spread tentacles (integration to back office etc) to other pieces of software in corp world, you can almost forget getting it removed. It is hard to get in, harder to get out.

4) In a way CRM is like AMZN. Some of the traditional metrics don't matter. What matters is revenue growth. FOr each $1 of revenue, they are keeping the competitors permanently at bay. Look at the growth of revenue per share for last 10 years.

The analogy that I've is that , CRM shareholders are owning the miracle tree that grows rapidly and generates a million seeds. The seeds are carried by wind near and far and they outsmart other seeds to grow in fresh virgin soil. The cycle repeats. The tree doesn't generate any fruits for now, but in the end, the owners of this tree will find a big area of land blanketed by this miracle tree. Once there is no more land left, the tree can stop producing seeds and start giving fruits.

The only troubling trend in CRM is the recent decline in ROIC. We need to see if this is one time blip or a permanent phenomenon. The short thesis precariously rests on this. A company doing lots of acquisitions will show more BV (through write up of Goodwill), so invested capital looks bigger (as opposed to spending on sales that is expensed). This might explain lower ROIC as well.

As economy expands, IT budgets go up and companies start ramping up software projects.
I would never short a growing software firm that is not issuing debt. Good luck to shorts, they need it in plenty.

Let's invert: the longs are looking at quality SAAS business model, consistent revenue growth, market share in a fairly sticky product business, 1st mover advantage in CRM software, and the ability of Salesforce.com to reduce their selling expenses (currently ~40% of revenue) in the future and thus generate FCF.

CRM as a business was exceptional  being the first to put forth a solid CRM system via SAAS model (thus in terms of driving a high EBITDA multiple and high customer retention).  So the underlying product is useful to customers and sticky.  This is true. 

The question is FCF generation.  When a dominant software company (say ORCL or MSFT) dominates their industry they begin gushing cash. Yet we haven't seen this with CRM even though much of their (bloated) sales staff is paid in "free money" equity.  Why is that?  Why can't CRM generate cash?  Oracle trades at 11x unlevered FCF, MSFT trades at 11.5x unlevered cash flow while CRM trades at 38x unlevered FCF. Is CRM's growth curve that emphatic with the big dog enterprise software players getting into the market?

The shorts are looking at unsustainable growth rate of revenue growth, questionable accounting, management selling stock hand over fist, low ROIC.  Said another way: In an upside case CRM will do ~$1.2 billion in FCF in FY2015, thus its trading at~25x FCF or a 4% FCF yield in an upside case?  Does this makes sense?

1) Yes, CRM is no GOOG or MSFT. Why then is it priced as if it is going to have a more than perfect future? When is the "amazingness" going to show in the numbers?

2) That cash flow through options trick only works as long as the stock plays along. 

3) I'm sure that is true, at least until a certain point. CRM's basic product is - from what I heard - more than adequate for its clients. However, I wonder what kind of possible mess they will be in after all the mindless acquisitions that get thrown in the mix. Egomaniacs and their diworsification of businesses has never proven to be a winning formula in the past. I don't see how it will be different this time, especially given the prices that are being paid. And it's not like it is getting any cheaper or easier to get a bigger piece of the pie. The easy part is over.

4) How is every dollar of revenue at amazon permanently in their hands? Are you talking about scale advantages in this specific case? Competition is only going to make the endless fight for revenue harder for both AMZN and CRM, not easier. In the fast changing world of today, it's very easy to lose your perceived moat in a blink. While a lot of that revenue might be very sticky for CRM, they will still have to fight for it.

Explain how standard metrics are useless please, I have little experience with miracle trees or the magical trolls such as Benioff that operate them... Maybe there is value in a business that sells dollars for 99 cent after all!
Title: Re: CRM - Salesforce.com
Post by: ScottHall on February 24, 2014, 01:29:17 AM
Great post.

I'm in ERP and haven't used CRM products. No position in CRM.

1) The comparison to GOOG and MSFT in SA article is specious. The latter two are natural monopolies. CRM needs to get their foot in the door. CRM is not a monopoly and it has to fight tooth and nail to gain revenue.

2) How do you short a company that is growing revenue at several factors of GDP growth, doesn't issue much debt and generates operating cash flow to fund most of growth?

3) Once you embed a software in corporate world, it gets very hard to take it out. It took me 4 years to remove a piece of software from my company as that functionality was now provided by the main ERP. For a big CRM implementation that would spread tentacles (integration to back office etc) to other pieces of software in corp world, you can almost forget getting it removed. It is hard to get in, harder to get out.

4) In a way CRM is like AMZN. Some of the traditional metrics don't matter. What matters is revenue growth. FOr each $1 of revenue, they are keeping the competitors permanently at bay. Look at the growth of revenue per share for last 10 years.

The analogy that I've is that , CRM shareholders are owning the miracle tree that grows rapidly and generates a million seeds. The seeds are carried by wind near and far and they outsmart other seeds to grow in fresh virgin soil. The cycle repeats. The tree doesn't generate any fruits for now, but in the end, the owners of this tree will find a big area of land blanketed by this miracle tree. Once there is no more land left, the tree can stop producing seeds and start giving fruits.

The only troubling trend in CRM is the recent decline in ROIC. We need to see if this is one time blip or a permanent phenomenon. The short thesis precariously rests on this. A company doing lots of acquisitions will show more BV (through write up of Goodwill), so invested capital looks bigger (as opposed to spending on sales that is expensed). This might explain lower ROIC as well.

As economy expands, IT budgets go up and companies start ramping up software projects.
I would never short a growing software firm that is not issuing debt. Good luck to shorts, they need it in plenty.

Let's invert: the longs are looking at quality SAAS business model, consistent revenue growth, market share in a fairly sticky product business, 1st mover advantage in CRM software, and the ability of Salesforce.com to reduce their selling expenses (currently ~40% of revenue) in the future and thus generate FCF.

CRM as a business was exceptional  being the first to put forth a solid CRM system via SAAS model (thus in terms of driving a high EBITDA multiple and high customer retention).  So the underlying product is useful to customers and sticky.  This is true. 

The question is FCF generation.  When a dominant software company (say ORCL or MSFT) dominates their industry they begin gushing cash. Yet we haven't seen this with CRM even though much of their (bloated) sales staff is paid in "free money" equity.  Why is that?  Why can't CRM generate cash?  Oracle trades at 11x unlevered FCF, MSFT trades at 11.5x unlevered cash flow while CRM trades at 38x unlevered FCF. Is CRM's growth curve that emphatic with the big dog enterprise software players getting into the market?

The shorts are looking at unsustainable growth rate of revenue growth, questionable accounting, management selling stock hand over fist, low ROIC.  Said another way: In an upside case CRM will do ~$1.2 billion in FCF in FY2015, thus its trading at~25x FCF or a 4% FCF yield in an upside case?  Does this makes sense?

1) Yes, CRM is no GOOG or MSFT. Why then is it priced as if it is going to have a more than perfect future? When is the "amazingness" going to show in the numbers?

2) That cash flow through options trick only works as long as the stock plays along. 

3) I'm sure that is true, at least until a certain point. CRM's basic product is - from what I heard - more than adequate for its clients. However, I wonder what kind of possible mess they will be in after all the mindless acquisitions that get thrown in the mix. Egomaniacs and their diworsification of businesses has never proven to be a winning formula in the past. I don't see how it will be different this time, especially given the prices that are being paid. And it's not like it is getting any cheaper or easier to get a bigger piece of the pie. The easy part is over.

4) How is every dollar of revenue at amazon permanently in their hands? Are you talking about scale advantages in this specific case? Competition is only going to make the endless fight for revenue harder for both AMZN and CRM, not easier. In the fast changing world of today, it's very easy to lose your perceived moat in a blink. While a lot of that revenue might be very sticky for CRM, they will still have to fight for it.

Explain how standard metrics are useless please, I have little experience with miracle trees or the magical trolls such as Benioff that operate them... Maybe there is value in a business that sells dollars for 99 cent after all!

Nothing to add on CRM one way or the other, but I would warn against being so offensively dismissive, Tombgrt. You may disagree with him, but by being a prick about it I think you're shorting yourself the opportunity to pick up additional mental models.

If you evaluate his opinion and just disagree with them, that's fine, but you should keep your disagreement to the facts and not by coming up with witty ways to poke fun at your conversation partner.
Title: Re: CRM - Salesforce.com
Post by: Vish_ram on February 25, 2014, 04:18:03 AM
No offense taken.

Lets take the hypothetical case of Softville. The two companies Riskoff and Benioff are CRM companies with sales of 10MM. Riskoff is growing at 10% and Benioff at 40%, they both spend 15% of revenues on R&D. Riskoff never overspends to increase sales, focuses on profits, ROE, free cash flow and buybacks. Riskoff's CEO generously sprinkles his shareholder report with Buffett and Munger quotes. Value investors go gaga on Riskoff as all free cash flow goes to buyback.

Riskoff shuns acquisitions at more than 10 times P/E.

Benioff's swashbuckling CEO, pouring every penny back into the company, increasing sales force, achieves great growth. The market cheers, values it for growth. Benioff awards generous stock options, attracting the best talent and creates the virtuous cycle. Fast forward 10 years, the revenues of Riskoff and Benioff are 25MM and 290MM respectively. With 15% spent on R&D, Benioff spends 10 times more money on R&D than Riskoff.

Benioff's product offerings explode, and aided by acquisitions they start bundling all the product suite wiht one single attractive price. The Riskoff product suite is now a small subset and can be considered a small feature in the broad product offering of Benioff. Everybody abandons Riskoff in the next upgrade cycle and moves to Benioff.

The Riskoff with great free cash flow and excellent capital allocation  suddenly declares bankruptcy.

In software, the #1 player takes home bulk of profits and creates a self fulfilling prophesy.

A short on CRM is a bet that revenue growth is coming to a halt. It is a bet that movement towards cloud computing, saas is slowing down. The q is , who is speculating more? the longs or the shorts.

Speaking of valuations, a not too bright guy (yours truly) who was with Oracle when Benioff started CRM thought CRM was most over hyped and over valued company in the world. Fast forward to today, the statement may be still true (hope the valuation part :) ) and stock is up 15 times.
Title: Re: CRM - Salesforce.com
Post by: Palantir on February 25, 2014, 09:57:21 AM
this company is ridiculously overpriced and will come back to earth eventually.

What should it be priced?
Title: Re: CRM - Salesforce.com
Post by: wellmont on February 25, 2014, 10:37:49 AM
at least 50% lower. for starters.
Title: Re: CRM - Salesforce.com
Post by: jschembs on February 25, 2014, 07:03:27 PM
this company is ridiculously overpriced and will come back to earth eventually.

What should it be priced?

$25-30 is reasonable
Title: Re: CRM - Salesforce.com
Post by: tombgrt on March 01, 2014, 12:54:36 AM
Great post.

I'm in ERP and haven't used CRM products. No position in CRM.

1) The comparison to GOOG and MSFT in SA article is specious. The latter two are natural monopolies. CRM needs to get their foot in the door. CRM is not a monopoly and it has to fight tooth and nail to gain revenue.

2) How do you short a company that is growing revenue at several factors of GDP growth, doesn't issue much debt and generates operating cash flow to fund most of growth?

3) Once you embed a software in corporate world, it gets very hard to take it out. It took me 4 years to remove a piece of software from my company as that functionality was now provided by the main ERP. For a big CRM implementation that would spread tentacles (integration to back office etc) to other pieces of software in corp world, you can almost forget getting it removed. It is hard to get in, harder to get out.

4) In a way CRM is like AMZN. Some of the traditional metrics don't matter. What matters is revenue growth. FOr each $1 of revenue, they are keeping the competitors permanently at bay. Look at the growth of revenue per share for last 10 years.

The analogy that I've is that , CRM shareholders are owning the miracle tree that grows rapidly and generates a million seeds. The seeds are carried by wind near and far and they outsmart other seeds to grow in fresh virgin soil. The cycle repeats. The tree doesn't generate any fruits for now, but in the end, the owners of this tree will find a big area of land blanketed by this miracle tree. Once there is no more land left, the tree can stop producing seeds and start giving fruits.

The only troubling trend in CRM is the recent decline in ROIC. We need to see if this is one time blip or a permanent phenomenon. The short thesis precariously rests on this. A company doing lots of acquisitions will show more BV (through write up of Goodwill), so invested capital looks bigger (as opposed to spending on sales that is expensed). This might explain lower ROIC as well.

As economy expands, IT budgets go up and companies start ramping up software projects.
I would never short a growing software firm that is not issuing debt. Good luck to shorts, they need it in plenty.

Let's invert: the longs are looking at quality SAAS business model, consistent revenue growth, market share in a fairly sticky product business, 1st mover advantage in CRM software, and the ability of Salesforce.com to reduce their selling expenses (currently ~40% of revenue) in the future and thus generate FCF.

CRM as a business was exceptional  being the first to put forth a solid CRM system via SAAS model (thus in terms of driving a high EBITDA multiple and high customer retention).  So the underlying product is useful to customers and sticky.  This is true. 

The question is FCF generation.  When a dominant software company (say ORCL or MSFT) dominates their industry they begin gushing cash. Yet we haven't seen this with CRM even though much of their (bloated) sales staff is paid in "free money" equity.  Why is that?  Why can't CRM generate cash?  Oracle trades at 11x unlevered FCF, MSFT trades at 11.5x unlevered cash flow while CRM trades at 38x unlevered FCF. Is CRM's growth curve that emphatic with the big dog enterprise software players getting into the market?

The shorts are looking at unsustainable growth rate of revenue growth, questionable accounting, management selling stock hand over fist, low ROIC.  Said another way: In an upside case CRM will do ~$1.2 billion in FCF in FY2015, thus its trading at~25x FCF or a 4% FCF yield in an upside case?  Does this makes sense?

1) Yes, CRM is no GOOG or MSFT. Why then is it priced as if it is going to have a more than perfect future? When is the "amazingness" going to show in the numbers?

2) That cash flow through options trick only works as long as the stock plays along. 

3) I'm sure that is true, at least until a certain point. CRM's basic product is - from what I heard - more than adequate for its clients. However, I wonder what kind of possible mess they will be in after all the mindless acquisitions that get thrown in the mix. Egomaniacs and their diworsification of businesses has never proven to be a winning formula in the past. I don't see how it will be different this time, especially given the prices that are being paid. And it's not like it is getting any cheaper or easier to get a bigger piece of the pie. The easy part is over.

4) How is every dollar of revenue at amazon permanently in their hands? Are you talking about scale advantages in this specific case? Competition is only going to make the endless fight for revenue harder for both AMZN and CRM, not easier. In the fast changing world of today, it's very easy to lose your perceived moat in a blink. While a lot of that revenue might be very sticky for CRM, they will still have to fight for it.

Explain how standard metrics are useless please, I have little experience with miracle trees or the magical trolls such as Benioff that operate them... Maybe there is value in a business that sells dollars for 99 cent after all!

Nothing to add on CRM one way or the other, but I would warn against being so offensively dismissive, Tombgrt. You may disagree with him, but by being a prick about it I think you're shorting yourself the opportunity to pick up additional mental models.

If you evaluate his opinion and just disagree with them, that's fine, but you should keep your disagreement to the facts and not by coming up with witty ways to poke fun at your conversation partner.

I'm sorry if it came of as off offensive to Scotthall or anyone else, that was not my intention. My intention with the last paragraph was simply to poke a little fun with the comment on the "magical tree". (*) I think that I asked some valid and fair questions in the rest of my post so I don't really see where you are coming from when you say that I dismiss other views. I respect everyone's view, especially since most people here are a heck of a lot older, wiser and smarter than me.

(*) IMO my attempt at being funny is especially relevant considering what's going on with CRM. Giving away stuff is easy, making money and intensively competing with big players is something else. Another perfect (small) beat this Q and all is well! Look at operating margins declining, SG&A going through the roof, increase in stock option compensation, ... You can extrapolate any reasonable growth number and let them finance it with stock, it's not going to add up to the current stock price. I understand what Vish_ram is saying but the numbers simply don't tell the story of a healthy, profitable, succesful company, now or in the future. I don't see this ending well, with or without the stock taking a dive first. I increased my put option exposure before earnings Thursday and bought some more during the day yesterday. These are all long dated. I'm confident in this position considering where we are with market valuations, sector valuations, detoriating financials, insiders selling hand over fist, relative cheapness of the options, market cap of CRM compared to smaller but equally overvalued competitors, ... Still a good change that I lose 100% of this position but I don't see my odds getting much better from here. We'll see, GL to all!  ;)
Title: Re: CRM - Salesforce.com
Post by: Phaceliacapital on March 06, 2014, 11:43:28 PM
http://seekingalpha.com/article/2073073-salesforce-com-cant-tell-you-where-its-revenues-come-from

Who makes this up :D ??

Quote
Salesforce also noted that its 38% growth for the year under review "...was due to new customers, upgrades, and additional subscriptions from existing customers and improved renewal rates..." Yet, when the SEC asked Salesforce to provide the contribution of each factor to the company's growth, Salesforce admits that they "...do not separately quantify or monitor the separate impact of these enumerated factors." In other words, growth must come from these factors, because they cannot think of anywhere else revenue growth could have come from.
Title: Re: CRM - Salesforce.com
Post by: tombgrt on March 07, 2014, 01:33:41 AM
Ha!

Quote
In reporting 33% revenue growth last year "due almost entirely" to new customers and existing customers, Salesforce omits that 19% of that growth came from a single acquisition.

Another point I forgot to mention in my previous post. There is no way they can finance their unprofitable growth and keep it at the same pace if the stock would take a hit. At some point the self fulfilling prophecy will revert course IMO.
Title: Re: CRM - Salesforce.com
Post by: tombgrt on March 14, 2014, 04:00:53 AM
http://seekingalpha.com/article/2075543-beyond-gaap-does-salesforce-look-much-better

Another excellent article by board member jschembs.
Title: Re: CRM - Salesforce.com
Post by: Phaceliacapital on March 14, 2014, 04:31:34 AM
Quote
I've also argued in the past why I believe acquisitions should be deducted against OCF in determining CRM's FCF, but this analysis excludes acquisitions.

And still massively overvalued, unbelievable
Title: Re: CRM - Salesforce.com
Post by: tombgrt on March 14, 2014, 05:51:02 AM
this company is ridiculously overpriced and will come back to earth eventually.

What should it be priced?

$25-30 is reasonable

Btw, I was surprised by this 'target' given your posts on SA. I have that target as well for most of my put options but believe we could easily see it tumble way lower exactly because they rely on an ever increasing stock price. I'd gladly sell my leaps at $25-35 and buy more with much lower strikes. But hey, this stock is more likely to hit $100 first anyway...
Title: Re: CRM - Salesforce.com
Post by: Phaceliacapital on March 14, 2014, 06:41:58 AM
Quote
Title: Salesforce.com Announces Appointment of General Colin Powell to its Board of Directors

Just because they can!
Title: Re: CRM - Salesforce.com
Post by: tombgrt on March 14, 2014, 07:35:54 AM
Haha. Seriously, I should stop reading all this stuff. Confirmation bias is getting me.
Title: Re: CRM - Salesforce.com
Post by: jschembs on March 14, 2014, 07:49:41 AM
this company is ridiculously overpriced and will come back to earth eventually.

What should it be priced?

$25-30 is reasonable

Btw, I was surprised by this 'target' given your posts on SA. I have that target as well for most of my put options but believe we could easily see it tumble way lower exactly because they rely on an ever increasing stock price. I'd gladly sell my leaps at $25-35 and buy more with much lower strikes. But hey, this stock is more likely to hit $100 first anyway...

You raise a good point, likely due to my own anchoring after seeing market prices so much consistently higher. I think a more realistic value is $15-20, but not sure if/when we'd get there. However, one thing I learned in shorting NFLX in 2011 is that once the market begins to sniff out liquidity risks, things can go crazy quite quickly. I don't foresee liquidity risks with CRM, although one of their convertibles comes due in early 2015, and if they had any serious growth hiccup, FCF would be seriously impacted, since a large portion of the company's FCF results from growth in negative working capital.

On a separate note, does anyone have a subscription to theinformation.com? There's an article on CRM that quotes Bernstein's analyst, who has called their accounting practices into question for years. Unfortunately, I can't access the entire article.

https://www.theinformation.com/Amid-Cloud-Mania-Questions-about-Salesforce-s-Growth
Title: Re: CRM - Salesforce.com
Post by: tombgrt on March 17, 2014, 10:42:43 AM
Thanks jschembs, appreciate the added color. :)

Would be interested in the article as well!
Title: Re: CRM - Salesforce.com
Post by: writser on March 23, 2014, 04:27:28 PM
I like how I sometimes get shown Salesforce ads on CoBF when browsing this topic.
Title: Re: CRM - Salesforce.com
Post by: tombgrt on March 25, 2014, 08:09:33 AM
Lucky so far so decided to lower exposure and use parts of my current profit for a higher leveraged bet. Sold my ITM 55 '15 puts (25% of total position) and decided to use half (about the value of the profit) to buy more far OTM '15 puts (strike $35, also own $40 and $45).
Title: Re: CRM - Salesforce.com
Post by: tombgrt on April 03, 2014, 06:59:28 AM
Salesforce.com Announces New Industries Strategy

http://seekingalpha.com/pr/9462623-salesforce-com-announces-new-industries-strategy


Quote
"As we look to grow to $10 billion and beyond, our new industries strategy is a huge opportunity for salesforce.com (CRM) to expand our footprint within existing customers and reach new enterprise customers," said Keith Block, president and vice chairman, salesforce.com . "Companies across all industries are turning to salesforce.com to help them transform their business models and connect with their customers in new ways."

Quote
Industry Solutions for the Internet of Customers
The world is becoming completely connected. Every day, millions of new products, apps and devicesfrom every industryare connecting to the Internet. By 2020, there will be more than 50 billion connected things, from smartphones and wearable smart devices to jet engines and cars. And behind every product, every app and every device there is a customer. It is the Internet of Customers, and customer relationship management has never been more important.


bla bla bla... What was their internal growth rate again, not to mention FCF/share?
Title: Re: CRM - Salesforce.com
Post by: tombgrt on April 03, 2014, 07:39:28 AM
WDAY -5%. I have been contemplating going short this one as well (given that the valuation is even much higher than CRM) but with a 10%+ put position (2015) in CRM I figured I probably have enough. Seems like there growth still has plenty of momentum as well and that there are less potential accounting problems. The CRM put position (and others) is also more than enough to let me stay aggressive on the long side of my portfolio.
Title: Re: CRM - Salesforce.com
Post by: jschembs on April 03, 2014, 09:52:43 AM
WDAY -5%. I have been contemplating going short this one as well (given that the valuation is even much higher than CRM) but with a 10%+ put position (2015) in CRM I figured I probably have enough. Seems like there growth still has plenty of momentum as well and that there are less potential accounting problems. The CRM put position (and others) is also more than enough to let me stay aggressive on the long side of my portfolio.

I'm short WDAY as well. CRM and WDAY are my only two short positions. I think WDAY has much more honest management than CRM (compare the way Bhusri describes their performance and future opportunities vs Benioff), but WDAY's addressable market isn't all that large, and at ~35x trailing revenue, there's no set of future outcomes that get you anywhere near the current stock price.
Title: Re: CRM - Salesforce.com
Post by: tombgrt on April 04, 2014, 09:34:49 AM
Thanks for your insight jschembs! Full disclore: I bought some otm puts at opening for wday seeing it pop up 2%. More speculation that we might finally see decent reversal to more normal levels and it also helped to make me feel better about buying more gncma. :D Not that they correlate all that well...
Title: Re: CRM - Salesforce.com
Post by: tombgrt on April 12, 2014, 03:41:13 PM
http://www.bloomberg.com/news/2014-04-11/salesforce-tower-rents-said-to-set-san-francisco-record.html
http://seekingalpha.com/news/1671393-salesforce-spending-690m-on-hq-gets-naming-rights-thrown-in

Sorry, I like to post these tidbits... Can't help myself!
Title: Re: CRM - Salesforce.com
Post by: tombgrt on April 23, 2014, 06:42:47 AM
http://seekingalpha.com/article/2156773-salesforce-in-the-red-for-now-but-not-forever

Quote
If you looked at Salesforce.com's (CRM) trailing year return on equity, assets or net margin, you wouldn't be convinced that it was a good investment. However, the company has delivered share price growth of nearly 30% in a year. Had it not been the decline (see graph below) that started after Salesforce announced its fourth quarter result at the end of February this year, the gain on investment per annum would've been more than 50% on share price alone.

Yeah, that's a valid valuation method. Only one correct response:

https://www.youtube.com/watch?v=70eU840lc38
Title: Re: CRM - Salesforce.com
Post by: Palantir on April 23, 2014, 06:46:38 AM
Well he's right, people have been making the same argument as you for years now, and there's only one way CRM's stock has moved: up. There are no points for "sound" valuation when the stock price goes the other way.
Title: Re: CRM - Salesforce.com
Post by: Phaceliacapital on April 23, 2014, 06:47:04 AM
Holy shit why did I ever learn about business valuation if it is that easy :D
Title: Re: CRM - Salesforce.com
Post by: Phaceliacapital on April 23, 2014, 06:49:20 AM
Prediction: Stock corrects to proper price ($10) and Oracle buys them in the most unholy of smug press conferences where Larry is talking and Marc is counting his billions and thinking about his next venture where he fools the masses once again that he cares about shareholders.

:D
Title: Re: CRM - Salesforce.com
Post by: tombgrt on April 23, 2014, 07:02:38 AM
Well he's right, people have been making the same argument as you for years now, and there's only one way CRM's stock has moved: up. There are no points for "sound" valuation when the stock price goes the other way.

Hu what? What are you doing here then? Don't call yourself a value investor if you game is momentum.

Meanwhile I'll add to my option shorts in these POS's. I can wait a few years and still strike it big, no worries!
Title: Re: CRM - Salesforce.com
Post by: Palantir on April 23, 2014, 07:07:49 AM
Don't call yourself an investor if you don't realize that your return depends on the ending price.
Title: Re: CRM - Salesforce.com
Post by: jschembs on April 23, 2014, 07:42:07 AM
Don't call yourself an investor if you don't realize that your return depends on the ending price.

Palantir, what is your point with this and your previous post? Obviously he understands return depends on the price at which the asset is currently marked or ultimately sold. Does the fact that he (and I) have paper losses on a short investment in CRM, and because the stock chart has moved against us over the last year or two, mean we're not "investing" properly? If the facts and valuation arguments changed, and we did not alter our views, that would be one thing, but I'd tend to call someone who adjusts their view and portfolio based on what the stock charts tell them a trader rather than an investor.
Title: Re: CRM - Salesforce.com
Post by: Palantir on April 23, 2014, 07:50:14 AM

So say tombgrt makes a great case for why CRM is overvalued, and the market responds by tripling CRM's price over the next five years. Was his analysis successful?
Title: Re: CRM - Salesforce.com
Post by: jschembs on April 23, 2014, 07:51:52 AM
So say tombgrt makes a great case for why CRM is overvalued, and the market responds by tripling CRM's price over the next five years. Was his analysis successful?

If the case is truly great, in five years the market will have come to its senses.
Title: Re: CRM - Salesforce.com
Post by: Palantir on April 23, 2014, 07:56:31 AM
^So, your opinion  of whether the analysis is great or not depends on the market price?
Title: Re: CRM - Salesforce.com
Post by: jschembs on April 23, 2014, 08:02:00 AM
^So again, your opinion  of whether the analysis is great or not depends on the market price? Cool.

Your sarcasm is a wonderful addition to the conversation. All I'm saying is that being wrong over a year or two doesn't mean the analysis is wrong. Over 3-5 years, you must assume the market is correct.
Title: Re: CRM - Salesforce.com
Post by: Liberty on April 23, 2014, 08:03:32 AM
^So again, your opinion  of whether the analysis is great or not depends on the market price? Cool.

All investing is a cash to cash transaction, so the end price always matters. But it doesn't mean that you can't make decisions based on fundamentals rather than other things (momentum, how charts look, etc). I think Tom is making his decisions based on fundamentals, and so trying to say that he's not an investor or whatever is unfair. That doesn't mean that he'll be proven right in the end, but none of us can be sure of that either.

The market always has the option of being irrational. That goes for shorts as well as long. What if everybody on this board had bought BAC at $7 because of how the fundamentals looked and years later it was at $3? That's the same kind of thing you're saying.

We have to be right on process because we control that while we don't control outcomes.
Title: Re: CRM - Salesforce.com
Post by: Avyalake on April 23, 2014, 08:04:08 AM

So say tombgrt makes a great case for why CRM is overvalued, and the market responds by tripling CRM's price over the next five years. Was his analysis successful?

Is this not Outcome bias? http://en.wikipedia.org/wiki/Outcome_bias
Isn't value investing about a process. Not every investment is guaranteed to be successful?
Title: Re: CRM - Salesforce.com
Post by: Palantir on April 23, 2014, 08:11:19 AM
^So again, your opinion  of whether the analysis is great or not depends on the market price? Cool.

Your sarcasm is a wonderful addition to the conversation. All I'm saying is that being wrong over a year or two doesn't mean the analysis is wrong. Over 3-5 years, you must assume the market is correct.

Have you looked at CRM's performance since inception? Do you realize that the arguments made against CRM right now are the same as years ago, especially as you note that over 3-5 years the market is correct.
Title: Re: CRM - Salesforce.com
Post by: jschembs on April 23, 2014, 08:17:04 AM
We're not talking about short positions initiated 5 years ago, we're talking about short positions initiated in the last year.
Title: Re: CRM - Salesforce.com
Post by: jschembs on April 23, 2014, 08:18:18 AM
^So again, your opinion  of whether the analysis is great or not depends on the market price? Cool.

Your sarcasm is a wonderful addition to the conversation. All I'm saying is that being wrong over a year or two doesn't mean the analysis is wrong. Over 3-5 years, you must assume the market is correct.

Have you looked at CRM's performance since inception? Do you realize that the arguments made against CRM right now are the same as years ago, especially as you note that over 3-5 years the market is correct.

I'm not disagreeing with you that shorting CRM 5 years ago would've been a horrible decision.
Title: Re: CRM - Salesforce.com
Post by: tombgrt on April 23, 2014, 08:18:44 AM
I have been short these kind of stocks for 3 months and on average I am in the plus. A period of 3 years would be short, markets can stay irrational much longer. In the case of crm I believe that various things can't keep up appearances for another 1-2 years and especially if the stock price slumps. Funny fact is that the market has been right about crm for a xouple of years now (or so it seems) exactly because the stock has been rising!
Title: Re: CRM - Salesforce.com
Post by: Palantir on April 23, 2014, 08:19:48 AM
^So again, your opinion  of whether the analysis is great or not depends on the market price? Cool.

All investing is a cash to cash transaction, so the end price always matters. But it doesn't mean that you can't make decisions based on fundamentals rather than other things (momentum, how charts look, etc). I think Tom is making his decisions based on fundamentals, and so trying to say that he's not an investor or whatever is unfair.

The market always has the option of being irrational. That goes for shorts as well as long. What if everybody on this board had bought BAC at $7 because of how the fundamentals looked and years later it was at $3? That's the same kind of thing you're saying.

We have to be right on process because we control that while we don't control outcomes.

To some extent I agree with you, but when you say that tombgrt is making an argument on fundamentals, how can you be sure that he really is fundamentally sound and the market is being irrational? How do you determine who is being rational? :) As you surely have noted, a significant section of stocks continually trade at very high valuations and have done so for years on end. At some point, isn't it worth wondering that maybe the process is not as ironclad as previously thought?
Title: Re: CRM - Salesforce.com
Post by: writser on April 23, 2014, 08:24:05 AM
To some extent I agree with you, but when you say that tombgrt is making an argument on fundamentals, how can you be sure that he really is fundamentally sound and the market is being irrational? How do you determine who is being rational? :) As you surely have noted, a significant section of stocks continually trade at very high valuations at conventional metrics and have done so for years on end. At some point, isn't it worth wondering that maybe the process is not as ironclad as previously thought?

"The four most dangerous words in investing are: 'this time it's different.'" Sir John Templeton, legendary investor and philanthropist.

Obviously they agree with John and you do apparently not. No point in starting a fight here ..

Title: Re: CRM - Salesforce.com
Post by: tombgrt on April 23, 2014, 08:39:50 AM
^So again, your opinion  of whether the analysis is great or not depends on the market price? Cool.

All investing is a cash to cash transaction, so the end price always matters. But it doesn't mean that you can't make decisions based on fundamentals rather than other things (momentum, how charts look, etc). I think Tom is making his decisions based on fundamentals, and so trying to say that he's not an investor or whatever is unfair.

The market always has the option of being irrational. That goes for shorts as well as long. What if everybody on this board had bought BAC at $7 because of how the fundamentals looked and years later it was at $3? That's the same kind of thing you're saying.

We have to be right on process because we control that while we don't control outcomes.

To some extent I agree with you, but when you say that tombgrt is making an argument on fundamentals, how can you be sure that he really is fundamentally sound and the market is being irrational? How do you determine who is being rational? :) As you surely have noted, a significant section of stocks continually trade at very high valuations and have done so for years on end. At some point, isn't it worth wondering that maybe the process is not as ironclad as previously thought?

As with going long in value investments, you can't be sure until it actually happens, simple as that. The difference with going short/options is that you have a more prominent timing element and the fact that long positions generally increase in value during your holding period. So yeah, you want to be proven right at a certain point.

But what the market has done the last 5 years shouldn't make it any more unlikely that my thesis plays out by say 2016-2017. It is what it is and it has led me to believe that those stocks are currently overvalued. If the price action of the last few years didn't occur, I wouldn't be talking about being short CRM anyway.

I wouldn't have shorted CRM in 2010-2012 exactly because there was all this room for future expectations and beating of market expectations with stellar growth. CRM is running out of options to surprise investors while the stock keeps going up fiercly despite these changing circumstances. I have a hard time explaining this in English but to me it seems there is simply a shift in the underlying business reality. Internal growth slowing which they have to keep up with expensive acquisitions, debt to be refinanced soon, expenses increasing faster than revenue, bigger players making progress so competition starts to increase, stock compensation to pay employees has reached a point at which say 50% drop in the share price would be catastrophic, ... etc. You could say that they got too big and they used up all tricks to keep fooling the market for long. That is why I am short now and not 2 years ago or some time in the future.
Title: Re: CRM - Salesforce.com
Post by: Palantir on April 23, 2014, 09:01:28 AM
^Fair enough then, thanks for explaining your POV.
Title: Re: CRM - Salesforce.com
Post by: enoch01 on April 23, 2014, 10:17:31 AM
Those of you who are short using options, what kind of expected returns are you estimating?  $55 2016 puts are priced at $9.6.  Personally I estimate the expected payout on something like that would give you a double.  But I don't have confidence in the odds.  Of course if you know it's going to $10 in the next few months or something, more power to you.

All else equal, I would like to short Salesforce.  The only problem is that lots of people appear to be really excited about shorting it as well.
Title: Re: CRM - Salesforce.com
Post by: writser on April 23, 2014, 10:50:51 AM
7% of shares outstanding is shorted. That's quite a lot but not even close to SHLD, LULU, HLF, SODA and some other controversial names.
Title: Re: CRM - Salesforce.com
Post by: jschembs on April 23, 2014, 10:53:43 AM
7% of shares outstanding is shorted. That's quite a lot but not even close to SHLD, LULU, HLF, SODA and some other controversial names.

And a lot of that short is hedging those long the two convertibles
Title: Re: CRM - Salesforce.com
Post by: tombgrt on April 29, 2014, 08:07:49 AM
This is just a silly observation but it's interesting to note that analysts are finally asking about growth versus profitability in NetSuite's Q&A. Answers of course stay very vague. But hey, they are making some big deals: $200,000+ each baby! Sorry for all the sarcasm...
Title: Re: CRM - Salesforce.com
Post by: Phaceliacapital on April 30, 2014, 08:21:19 AM
http://www.mckinsey.com/Insights/High_Tech_Telecoms_Internet/Grow_fast_or_die_slow?cid=other-eml-alt-mip-mck-oth-1404
Title: Re: CRM - Salesforce.com
Post by: tombgrt on May 03, 2014, 05:42:03 AM
http://www.valuewalk.com/2014/05/salesforce-com-inc-crm-cant-grow-without-acquisitions/

Quote
Bernstein Research estimates that Salesforce.com, inc. (NYSE:CRM) will need about $550 million of inorganic revenue in FY2016 to maintain the 30% growth rate. Notably, the company acquired ExactTarget at a price/revenue multiple of 7.6x. Assuming a conservative price/revenue multiple of 6x, the company will have to shell out $3.4 billion on acquisitions.


The above article (or research that they pulled) makes the growth problem pretty clear. One of the many reasons why CRM is finally running out of options.
Title: Re: CRM - Salesforce.com
Post by: tombgrt on May 03, 2014, 06:25:26 AM
Also: http://seekingalpha.com/article/2186103-salesforce-com-is-vulnerable-to-aggressive-pricing-by-competitors

Title: Re: CRM - Salesforce.com
Post by: tombgrt on May 21, 2014, 09:19:46 AM
Q1 out. Marc wasn't all that euphoric on this earnings call. Maybe he's realizing something?  :P

Also loved pieces like this:

Quote
Operator

Your next question comes from the line of Pat Walravens with JMP Group.

Pat Walravens - JMP Group
Two questions. I guess Graham can you tell us what the contribution was from ExactTarget in the quarter? And then Marc now that you have over 14,000 employees, it’s got to be harder to maintain the same culture you had when you were smaller. How are you going about doing that?

Marc Benioff - Chairman and CEO
Well I’ll take that one first, and also I didn’t answer Heather’s question. First, so why don’t I hit that real quickly. Heather is absolutely right. Our plan is to build a comprehensive marketing cloud and to do that we’ve acquired several different companies recruiting, Radian6, Buddy Media and ExactTarget and we’re integrating those into one integrated application which our customers will have used to comprehensively manage their marketing and you’ll see the evolution of that product at Dreamforce.

What I would say is that to really understand where we’re going and how we’re maintaining this culture, you have to look at our product. And I am sure that that must sound a little bit strange but I use Salesforce1 every day and I’m communicating and collaborating with our employees. We have an environment that’s filled with transparency and that transparency has created an environment of trust.

And that much communication or what I call over communication is kind of part of what we’re doing all the time. We over communicate, we over align, we’re constantly working on what we call V2MOM which is kind of our internal business process service, which lets us work on our visions, our values, our methods, obstacles and measurements. All of that is built into our application. And then at the core is our philanthropy model.

When we first started the company we put 1% of our equity and 1% of our profit and 1% of all of our employees’ time into a 501(c)(3) charity. As I mentioned in the script, that produces amazing results, like the 700,000 hours of community service and more than 50 million in grants and 20,000 nonprofits. But one thing that’s interesting is in your first day of employment at Salesforce we show you where your desk is, we show you where the kitchen is and then you go out and do something for other people. And you go to one of our soup kitchens here in San Francisco, you go to one of our homeless shelters, you go to one of our hospitals. And that really sets the tone of our culture. And it also provides the referential integrity for our culture.

And our culture is different than other technology companies. And when and as we’ve grown our Company, we’ve been able to maintain that culture by starting -- making sure that its philanthropy first and that has really set the values that are so important to us.

So when we look at values like trust, values like giving back, like service and then of course we have tremendous execution. That’s also a key value that we do we say we’re going to do. We delivered obviously a great quarter this quarter but this is not our first great quarter. We’ve had a lot of great quarters. And those things are the things that have really cemented our culture and that’s why it continues to be what it is today. So I hope that answers your question.

Keith Block - President and Vice Chairman
And just on your second question we don’t intend to provide a breakout of the exact target going forward on either the P&L or the balance sheet.

Ah what would you expect...
Title: Re: CRM - Salesforce.com
Post by: MYDemaray on May 21, 2014, 10:22:51 AM
Just jumping in this thread here and didn't really read through it so forgive me if I'm rehashing...and full disclosure funds that I manage are short CRM. 

Going through their financials, one thing that really stood out is that their cash flow is being driven by the growth in negative working capital which is a result of their deferred revenue liability.  In other words, they have a growing float from customer funds which they then have to earn out over the next quarter or year (according to the 10-K, this is how they book it). The problem is, once growth in negative working capital stops, so does the cash flow.  The caveat here is that Salesforce could easily fire its entire sales team and generate about $2bn annually, less maintenance capex ~$250mn). My guess is that growth would dwindle to about 3-5%, and the company would trade like a no growth business (this is just a mental exercise since it's not going to happen). 

My point is that the cash flow numbers the company is touting is not a run-rate cash flow, but rather highly dependent on signing up new accounts. Personally, I think I would call it "rationally" valued (by growth investor, not value investor standards) at $35/sh.  I don't see this as a terminal bet against the company, more of a tactical trading short and I only got short within the past week.  Obviously momentum valuation-based shorts can rip your face off, so I am will monitor it closely.
Title: Re: CRM - Salesforce.com
Post by: tombgrt on May 21, 2014, 10:35:35 AM
Just jumping in this thread here and didn't really read through it so forgive me if I'm rehashing...and full disclosure funds that I manage are short CRM. 

Going through their financials, one thing that really stood out is that their cash flow is being driven by the growth in negative working capital which is a result of their deferred revenue liability.  In other words, they have a growing float from customer funds which they then have to earn out over the next quarter or year (according to the 10-K, this is how they book it). The problem is, once growth in negative working capital stops, so does the cash flow.  The caveat here is that Salesforce could easily fire its entire sales team and generate about $2bn annually, less maintenance capex ~$250mn). My guess is that growth would dwindle to about 3-5%, and the company would trade like a no growth business (this is just a mental exercise since it's not going to happen). 

My point is that the cash flow numbers the company is touting is not a run-rate cash flow, but rather highly dependent on signing up new accounts. Personally, I think I would call it "rationally" valued (by growth investor, not value investor standards) at $35/sh.  I don't see this as a terminal bet against the company, more of a tactical trading short and I only got short within the past week.  Obviously momentum valuation-based shorts can rip your face off, so I am will monitor it closely.

That is assuming their customer retention rate is (close to) 100%. If you assume a high level of recurring revenue from existing customers, shouldn't we also see the marketing & sales line drop significantly over the years versus revenue? What is happening here? (Well I have an idea and it doesn't match a fair value of $35..  ;D)

It sure would be interesting to see what happened to revenues if they quit spending on M&S, or even halved it!
Title: Re: CRM - Salesforce.com
Post by: MYDemaray on May 21, 2014, 10:46:12 AM

That is assuming their customer retention rate is (close to) 100%. If you assume a high level of recurring revenue from existing customers, shouldn't we also see the marketing & sales line drop significantly over the years versus revenue? What is happening here? (Well I have an idea and it doesn't match a fair value of $35..  ;D)

It sure would be interesting to see what happened to revenues if they quit spending on M&S, or even halved it!

Fair enough. Generally when I short, I like to be as generous with my assumptions as possible and find situations where I can still get comfortable being short....but you're right, customer retention is not 100%, and they are slowly giving the company to the salesforce.
Title: Re: CRM - Salesforce.com
Post by: ni-co on June 10, 2014, 06:55:55 AM
I was on the lookout for some LEAP short ideas just to provide liquidity in a market downturn. CRM fits the bill:

http://dealbook.nytimes.com/2014/06/02/falling-price-of-shares-creates-risk-at-salesforce/

A company where a falling stock price causes liquidity issues and overall worsens the financials is a great short, I think.
Title: Re: CRM - Salesforce.com
Post by: brooklynvestor on August 18, 2014, 12:31:50 PM
I recently published on SeekingAlpha a detailed analysis of Salesforce's accounting for its product offerings. I thought this board might be interested to know about it:

Salesforce.com Should Disclose Profit Or Loss By Product Offering
http://seekingalpha.com/article/2429685-salesforce-com-should-disclose-profit-or-loss-by-product-offering
Title: Re: CRM - Salesforce.com
Post by: MYDemaray on August 18, 2014, 08:51:59 PM
Glad to know I'm in such great company short CRM. Always enjoy your posts.
Title: Re: CRM - Salesforce.com
Post by: Vish_ram on January 03, 2015, 05:06:16 AM
Revenue continues to grow at double digits. The firm is selling stock to pay debt.

At the end of bull run, this will one day be a good short. until then, it'll march on. This thread offers an education on tech valuations to budding value investors.
Title: Re: CRM - Salesforce.com
Post by: wbr on January 03, 2015, 05:12:14 AM
Revenue continues to grow at double digits. The firm is selling stock to pay debt.

At the end of bull run, this will one day be a good short. until then, it'll march on. This thread offers an education on tech valuations to budding value investors.

Chanos is short mainly because of accounting issues and not becasue of valuation. Tread carefully. (no pos)
Title: Re: CRM - Salesforce.com
Post by: jschembs on February 13, 2015, 08:55:12 AM
I've been out of CRM for a number of months, but have added aggressively to my short in the last two days. I think the thesis remains intact (slowing revenue growth will unmask issues in operating cash flow), and no one seems to be talking about FX impact. Additionally, 13.5 mm new shares are converting this quarter from the outstanding warrants. I'm curious if anyone else has revised thoughts.
Title: Re: CRM - Salesforce.com
Post by: Vish_ram on May 05, 2015, 02:21:48 PM
MSFT considering buying out CRM

http://fortune.com/2015/05/05/salesforce-halted-microsoft-bid/
Title: Re: CRM - Salesforce.com
Post by: Palantir on May 05, 2015, 07:13:40 PM
This is why you don't short these things....
Title: Re: CRM - Salesforce.com
Post by: jawn619 on May 05, 2015, 08:14:47 PM
This is why you don't short these things....

+1. Get my face ripped off? No thanks.
Title: Re: CRM - Salesforce.com
Post by: Vish_ram on November 19, 2015, 06:48:05 AM
Revenue continues to grow at double digits. The firm is selling stock to pay debt.

At the end of bull run, this will one day be a good short. until then, it'll march on. This thread offers an education on tech valuations to budding value investors.

Another Q of solid revenue growth; hope folks covered their shorts.
http://www.wsj.com/articles/salesforce-com-raises-outlook-as-revenue-rises-24-1447884379
Title: Re: CRM - Salesforce.com
Post by: jschembs on November 19, 2015, 07:55:13 AM
Thankfully I covered at 70. Still think this thing doesn't pass the smell test, but obviously companies like the product.
Title: Re: CRM - Salesforce.com
Post by: fareastwarriors on November 19, 2015, 08:00:32 AM
Maybe companies like their products but, as an employee, I hated it. Forgot the name of  product I used but it was crap. Thank goodness I don't have to work with it again.

I wish them well.
Title: Re: CRM - Salesforce.com
Post by: Liberty on November 30, 2018, 07:21:22 AM
So this used to be an almost consensus short a few years ago. At the time, I remember CRM being constantly mentioned all over the forum in multiple threads as an example of an overvalued company.

I was looking back through this thread to see what could be learned, and thought I'd bump it up in case anyone wanted to do the same or add something about it with the benefit of hindsight.
Title: Re: CRM - Salesforce.com
Post by: Liberty on March 17, 2019, 10:50:41 PM
https://www.forbes.com/sites/tomtaulli/2019/03/17/salesforce-com-20-secrets-to-its-125-billion-success/
Title: Re: CRM - Salesforce.com
Post by: KCLarkin on March 18, 2019, 08:20:53 AM
So this used to be an almost consensus short a few years ago. At the time, I remember CRM being constantly mentioned all over the forum in multiple threads as an example of an overvalued company.

I was looking back through this thread to see what could be learned, and thought I'd bump it up in case anyone wanted to do the same or add something about it with the benefit of hindsight.

Even with the benefit of hindsight, I don't think we have learned much with this one. The bull and bear cases remain exactly the same. I don't think you can resolve this debate until the growth slows down. Presumably, it will become a cash cow and justify the current valuation. On P/S, it doesn't look too overpriced to me.

Still not seeing great FCF conversion. It is printing stock like crazy (which is major source of FCF). Bulls will argue that GAAP earnings don't reflect owner earnings because of growth investments and customer acquisition costs. Bulls are correct here, but I am still surprised that this thing isn't already gushing cash. Yes, they are investing for growth but they also collect up front. I'm guessing they just don't have good cost discipline.

It has sustained high growth longer than I expected. But it is still pretty small, so could keep going for a long time.
Title: Re: CRM - Salesforce.com
Post by: Vish_ram on March 18, 2019, 09:34:25 AM
So this used to be an almost consensus short a few years ago. At the time, I remember CRM being constantly mentioned all over the forum in multiple threads as an example of an overvalued company.

I was looking back through this thread to see what could be learned, and thought I'd bump it up in case anyone wanted to do the same or add something about it with the benefit of hindsight.

I hope you did read some of my comments where I cautioned the shorts. The lesson is, high growth companies that aren't burning cash and leading the industry will trade at higher valuations in bull market and high in bear markets. The so called value investors cannot comprehend the "g" portion of the value equation. Folks will happily buy a dying company when it trades in single digit P/E with book value that will prove to be nothing.

I learnt my lesson and bought AMZN at 600. I should have bought it at 25, but overstayed in value camp.

My lesson is, avoid cash burning growing company that needs huge capex, capital outlay, offering commodities etc.
Title: Re: CRM - Salesforce.com
Post by: Liberty on March 18, 2019, 11:13:03 AM
I think another lesson is that many value investors didn't have the tools to evaluate the value of a SaaS company where there are high upfront customer acquisition costs but the recurring lifetime value of customers is positive for each cohort (but new cohorts hide current profitability, since as much as possible is re-invested in growth).
Title: Re: CRM - Salesforce.com
Post by: Vish_ram on March 18, 2019, 11:31:40 AM
I think another lesson is that many value investors didn't have the tools to evaluate the value of a SaaS company where there are high upfront customer acquisition costs but the recurring lifetime value of customers is positive for each cohort (but new cohorts hide current profitability, since as much as possible is re-invested in growth).

It is not just SaaS. It is having the right framework to understand sticky biz with growth attached. The biz also has the potential to expand the product offerings, add-ons that kind of expand the empire. It is like they sell you a hand kerchief and soon start selling pants, shirts, socks etc. I once worked for Oracle, they first sold database, then Oracle GL, AR, AP etc , slowly moved to manufacturing, CRM etc. I used to watch Oracle trading at 40 times cash flow, but growing very fast. I always used to wonder how can one justify owning Oracle. In the years it returned many times over.

The thing to watch for is if we are in a massive bubble (Nasdaq in 2000 was once in a lifetime tech bubble. Remember cisco was trading at 100 times sales).

Last few years, I have bought small positions in many SaaS/software and have done well (AYX, SLP, ZUO, PLAN, NEWR, TWOU...)

Another approach is to own XSW (or other tech etf's) and just forget about it.

A simple thumb rule is, Never short growth stocks. There are easier ways to lose money without heartache.

I can understand having trouble projecting growth. I made the mistake of thinking ULTA can never keep growing, but look at the last 10 year inc statement. Who could have imagined that??
Title: Re: CRM - Salesforce.com
Post by: SHDL on March 18, 2019, 03:10:33 PM
I have no opinion on this company, but a general observation is that if you look at the history of successful growth companies in their early days, like say Walmart in 1975, one thing that really stands out is that you could have paid comically high multiples of their TTM EPS to buy their stock and still done very well over the following decades.  The flip side is that if you shorted the stock of such a company just because the multiples look a bit high you would have done rather poorly.

So I think Vish_ram’s rule of thumb above is a good one. 
Title: Re: CRM - Salesforce.com
Post by: fuzzhead1506 on March 27, 2019, 09:33:54 AM
I have been a long time lurker of the forum here at COBF and for the most part I have been content to just watch the discussions instead of participate, but in the last few months there have been some posts that inspired me to spend the $20 for a membership.
It is interesting to me that consensus among the 2010 COBF crowd was long SHLD and short CRM.  I realize these are different industries and different customers but plugging some numbers into a lifetime value calculator could've put the members of this forum not just into a neutral position on these two stocks but have gone the opposite way.  Several of the Tiger Cubs of Julian Robertson were in fact just so - long CRM and short SHLD for the last decade.

Something that often reveals a lack of effort in thinking - or rather merely surface level cursory research - is when I talk with other investors and they say that a stock is cheap because of P/B or EV/EBIT but haven't thought through how a company will continue to keep the customers it has or grow the number of customers or make the customers spend additional dollars.  I don't think that I can say for sure that I am any better of a thinker in this respect than the next guy but maybe I can be the resident GARP guy.  I often remind friends or strangers that WB was able to think through the story when he made his investment with KO - it didn't just have a good valuation in the late 80's; he was able to say with pretty good confidence that Coke would be able to grow it's customer base, maintain the customers it already had, squeeze more profits out of those customers and that is pretty much exactly what it did.  Today nearly every person in the 1st world and emerging markets has a Coke product at least a few times a year and Coke products are more profitable than they were in the 80's.  This is what has made the investment a home run - not that it was cheap on a P/B ratio.  Conversely, WB stayed out of the SHLD trainwreck of the last decade by merely saying retail is a tough business.   

I would argue that CRM has been a story that has been much more difficult to wrap your head around primarily because it started from such a low number of customers.  When people use Salesforce.com however, they are more productive and this creates a flywheel effect where they get to spend more money with the platform and Salesforce can then grow the number of people that use the software. 

If there is a lesson to be learned, I think it should be that investors shouldn't stop at "the company should get a revaluation" in their research.  Think through why a company deserves a certain valuation as well.  Banks often trade at some multiple of book value close to 1 because the return on equity numbers discounted back by the 7-10% that most investors use gets you to that number.  Companies like FB and PG and BKNG and MA get higher valuations on their earnings than GM or FCAU because they are able to continue producing very high ROIC and should do so for the foreseeable future... 

Anyway - just some thoughts I had as I read Liberty's post regarding lessons learned.
Title: Re: CRM - Salesforce.com
Post by: Liberty on March 27, 2019, 12:21:13 PM
Welcome to the forum, fuzzhead. Excellent first post!
Title: Re: CRM - Salesforce.com
Post by: KCLarkin on March 28, 2019, 06:50:16 PM
I thought of CRM when I read this:
https://www.advisorperspectives.com/commentaries/2018/03/15/why-financial-statements-dont-work-for-highly-innovative-companies

Quote
earnings explains only 2.4% of variation in stock returns for a 21st century company

Edit to add:
When a company consistently screens as "expensive" (say trading consistently above 30x for five years), I'm always skeptical that it is "overvalued". I don't have an opinion on CRM, but there are plenty of recent examples of companies trading at 40x or 50x earnings that were actually very cheap.
Title: Re: CRM - Salesforce.com
Post by: Gregmal on March 28, 2019, 07:36:29 PM
I thought of CRM when I read this:
https://www.advisorperspectives.com/commentaries/2018/03/15/why-financial-statements-dont-work-for-highly-innovative-companies

Quote
earnings explains only 2.4% of variation in stock returns for a 21st century company

Edit to add:
When a company consistently screens as "expensive" (say trading consistently above 30x for five years), I'm always skeptical that it is "overvalued". I don't have an opinion on CRM, but there are plenty of recent examples of companies trading at 40x or 50x earnings that were actually very cheap.

I agree 100% and utilize the same reasoning with companies that escape my analytical skills. Short term, sure, things can go anywhere. But when something is what it is for a half decade or longer, the odds are that this is what it is.

I used to make this mistake, but ridding myself of it helped my ability to pivot into new ideas that otherwise I'd miss. Chances are, if I thought something was overvalued for 5+ years but it consistently trades at that valuation, I am the one who is wrong. The sooner you can come to terms with that the sooner you can re examine your investment thesis. Look at the VIC Wingstop thread. The best thing you can do for your portfolio is to figure out when you are wrong as soon as possible. Not make excuses to continue being wrong.
Title: Re: CRM - Salesforce.com
Post by: Spekulatius on March 28, 2019, 08:02:24 PM
I thought of CRM when I read this:
https://www.advisorperspectives.com/commentaries/2018/03/15/why-financial-statements-dont-work-for-highly-innovative-companies

Quote
earnings explains only 2.4% of variation in stock returns for a 21st century company

Edit to add:
When a company consistently screens as "expensive" (say trading consistently above 30x for five years), I'm always skeptical that it is "overvalued". I don't have an opinion on CRM, but there are plenty of recent examples of companies trading at 40x or 50x earnings that were actually very cheap.

Aren't the CRM companies in the end valued using accrual accounting and using non- GAAP and difficult to verify metrics like customer lifetime value. I think these metrics could become severely challenged when the cost of money goes up (in a recession etc).  when people start to use much higher discount rates. I am not sure I buy into this business model of cashless and profitless prosperity of AMZN, Uber, Lyft and other unicorn yet, but I wouldn’t bet on their demise either.

The “too hard pile” just gets bigger and bigger nowadays....
Title: Re: CRM - Salesforce.com
Post by: KCLarkin on March 29, 2019, 07:59:53 AM
I am not sure I buy into this business model of cashless and profitless prosperity of AMZN, Uber, Lyft and other unicorn yet, but I wouldn’t bet on their demise either.

CRM is still in my "too hard pile" but the obvious question is: why is this company spending 45% of revenue on sales & marketing. If this company could maintain current revenue while spending "only" 25% on sales, then it's maybe trading at 50x normalized earnings. Still seems expensive to me, but not irrational given the growth rate.
Title: Re: CRM - Salesforce.com
Post by: SHDL on March 29, 2019, 11:10:10 AM
I thought of CRM when I read this:
https://www.advisorperspectives.com/commentaries/2018/03/15/why-financial-statements-dont-work-for-highly-innovative-companies

That’s another central issue.  Personally, the sign I watch out for is when a company somehow keeps growing its revenues very quickly year after year without raising any capital and reporting little/no profits.  I take that as a good indication that the company is actually making more money than what the financial statements say and that it is re-investing those (invisible) “profits” through the income statement.