Salesforce as a stock to own in your financial portfolio: An analysis of CRM stock

Thoughts about Salesforce (stock ticker: CRM) for 2012:

It’s hard to know what to expect from Salesforce since it is such a volatile stock. Looking at the charts you can see that it really likes to bounce around. I have read some speculation that because of the way they account for their subscription money before accounting for costs of servicing the subscriptions, gives them the ability to play with the various scenarios to make growth, liabilities, and equity look however they want it to… so a lot of investors are willing to make a speculative bet based in part on CRM having lots of short interest, the recent pops, uncertainty in the overall market, and what some people consider to be an overvalued company (CRM and GOOG both came out in 2004 and goog is up around 7% while CRM is up over 12%, but does not show that kind of earnings/profit that Google has produced year after year)…

Whether a major correction in the share price comes to fruition is tough to say. Most of the analysts covering CRM have buy recommendations on it and site pretty enticing reasons why to buy/maintain a position in the stock (enterprise strength, aggressive hiring, strong guidance, etc..). The following article provides a little glimpse into the company's accounting methods...

http://www.seekingalpha.com/article/307912-netflix-green-mountain-coffee-is-salesforce-com-headed-down-the-same-road

In response to the article:

1.) Regarding the accounting for deferred commissions I tend to agree with the company's accounting measures. Where as the revenue is realized over the course of 12 to 24 months, i agree the commissions should also be expensed over the same period since they are so closely related to revenue. This does remove the transactions from the income statement to the balance sheet, however, that is where the deferred revenue lies (as a liability) which helps to offset.

2.) In regards to the capitalizing of software, once the software is proven to be economically feasible, GAAP accounting requires firms to capitalize software. So even though this may seem to be an accounting trick, it is actually required for companies. Additionally, I am not sure where the guy got his numbers from but the company looks to be capitalizing internal software over three years (I would consider this more aggressive than not) as opposed to the 10 years the author implies through his math.

All in all I would say the accounting is in line with GAAP principles. However, even in light of

2.) what I view to be ok accounting, I do agree with you that there is plenty to not like about this stock. For starters, analysts are expecting extremely good results boosted by strong seasonal trends. Either way, the company meets expectations, or disappoints. I don't think this is a quarter in which the company can blow by expectations and trade materially higher. This is reinforced by the current rich valuation (110x's 2011 earnings and 130x's 2012 earnings). With a growth rate of 25% (i think this is reasonable) the stock is trading at a PEG of 4x's (PE ratio over earnings growth). I don't go long anything with a PEG over 1.6. In general, a PEG of 1.5 is considered slightly overvalued. No matter what they report, the valuation is not on the side of the shareholders.

Lastly, GAAP net income is negative. For a 25% long term growth company to report a net loss is astonishing to me. The company spent too much last year in investing activities (almost equal to the income from operating activities) and is still aggressively hiring.

I do not think the stock is a screaming short, however, in my humble opinion it is a screaming "do not buy at these levels."

These are just my opinions and should not be used to decide to buy or sell any positions you may own in Salesforce stock. I am not any sort of financial guru… I just like to look at stocks. Again, please do not consider this expert advice and do your own due diligence before ever purchasing any stock or mutual fund.