CIF Stock Recommendation Report (Fall 2012) Date: 10/16/2012 Analyst Name: Matt Leid Company Name and Ticker: Salesforce.com (CRM) Section (A) Summary Recommendation Buy: Yes No Target Price: NA Stop-Loss Price: NA Sector: Information Technology Industry: Software Services Market Cap (in Billions): 20.87 # of Shrs. O/S (in Millions): 139 Current Price: $153.29 52 WK Hi: $164.75 52 WK Low: $94.09 EBO Valuation: $15.02 Morningstar (MS) Fair Value Est.: $81.00 MS FV Uncertainty: Average MS Consider Buying: $56.70 MS Consider Selling: $109.40 EPS (TTM): $1.31 EPS (FY1): $1.50 EPS (FY2): $1.99 MS Star Rating: One star Next Fiscal Yr. End Year : 2013 Month : January Forward P/E: 77.03 % Inst. Ownership: 100.46% Last Fiscal Qtr. End: Less Than 8 WK: Y N Mean LT Growth: 27.85% Inst. Ownership- Net Buy: Y N If Less Than 8 WK, next Earnings Ann. Date: PEG: 2.77 Short Interest Ratio: 6.40 Ratio Analysis Company Industry Sector P/E (TTM) 28.53 19.74 P/S (TTM) 7.90 3.14 3.57 P/B (MRQ) 11.03 4.35 3.72 P/CF (TTM) 140.46 15.43 13.31 Dividend Yield 2.27 1.94 Total Debt/Equity (MRQ) 26.87 12.75 18.08 Net Profit Margin (TTM) -1.40 15.72 13.88 ROA (TTM) -0.94 12.63 14.34 ROE (TTM) -2.24 24.30 20.36 Analyst Consensus Recommendation: Outperform Beta: 1.40 Short as % of Float: 11.90% 1
Investment Thesis Summary Company Profile: Salesforce.com provides enterprise cloud computing and social enterprise solutions. Ultimately, Salesforce.com provides its customers with applications for customer and collaboration relationship management through the internet. Fundamental Valuation: The stock seems to be overvalued based on its growth rate and current numbers. Relative Valuation: The stock seems to be overvalued compared to its competition. Revenue and Earnings Estimates: High growth rates are expected for this company Analyst Recommendations: Analysts believe that this stock will outperform. Institutional Ownership: The company has an extremely high amount of institutional ownership. Short Interest: The short interest is amount average, but has been increasing. Stock Price Chart: The stock price has increased above the average return in the past. 2
Section (B) Company Profile (two pages maximum) Company Summary Salesforce.com provides enterprise cloud computing and social enterprise solutions. Ultimately, Salesforce.com provides its customers with applications for customer and collaboration relationship management through the internet. The company has been incorporated since February 1999. Salesforce.com uses both internet browsers and mobile devices to deliver its services to its customers. Its social enterprise applications and platforms are sold to businesses on a subscription basis. The company has a direct sales team that is responsible for most of the company s sales, but they also attract some business indirectly through partnerships (Reuters, 1). The Company introduced Chatter, a collaboration application for the enterprise to connect and share information securely and in real-time. It serves its customers from third-party data center hosting facilities located in the United States and other countries. The Company s primary applications are sales cloud, service cloud, salesforce chatter, Salesforce Radian6 and Salesforce Data.com. (Reuters, 1). Salesforce.com s customers uses Salesforce.com s services to record, track, and share information about sales opportunities, sales leads, sales forecasts, the sales process, closed business, and manage sales territories. Customers also can create social profiles for their clients based on information from social networking sites such as Facebook, Twitter, and LinkedIn (Reuters, 2). Salesforce.com also offers its customers consulting, training, and development services in order to facilitate the adoption of its social enterprise services. These services are usually billed on a time and materials basis. These services are through both traditional classroom and online classroom settings. Business Model, Competition, Environment and Strategy Business Model and Strategy: Salesforce.com sells its services on a subscription basis. Most of the sales revenue comes from direct marketing, but the company also gets some revenue indirectly through its partnerships. The company works with its customers to insure that they are able to utilize their services to their full potential. Salesforce.com s services are centered around trying to improve a firm s sales by better managing customer relations. Competition and Environment: Salesforce.com is in the internet services industry, which is marked by high levels of competition. Overall, the industry has fairly low barriers to entry due to low capital requirements and high rivalry among firms because of high strategic stakes. The company has many customers, which makes the customer s bargaining power low. They have few suppliers, which makes the bargaining power of suppliers fairly high. Lastly, the threat of substitute products is moderate. The services that Salesforce.com provides is done differently than it has been in the past which makes this particular type of business very young. Many analysts believe that the level of competition Salesforce faces is likely to intensify in the coming years. 3
Revenue and Earnings History We see below that revenue has been increasing every single year. This is a very positive sign for the value of the stock. However, we see that actually earnings per share as fluctuated. Most recently, the earnings number was negative. This negative earnings number leads us to question whether or not our investment would provide us with a solid return. Increasing sales isn t good enough to outweigh negative earnings, and overall these numbers provide a relatively neutral result, if not a negative one. Interim Income Statement View: Income Statement Annual Interim In Millions of U.S. Dollars (except for per share items) 2013 2012-07-31 3 Months 2013 2012-04-30 3 Months 2012 2012-01-31 3 Months 2012 2011-10-31 3 Months 2012 2011-07-31 3 Months Total Revenue 731.6 695.5 631.9 584.3 546.0 Basic Normalized EPS (0.071) (0.141) (0.030) (0.028) (0.032) Annual Income Statement View: Income Statement Annual Interim In Millions of U.S. Dollars (except for per share items) 2012 2012-01-31 12 Months 2011 2011-01-31 12 Months 2010 2010-01-31 12 Months 2009 2009-01-31 Reclassified 2010-01-31 12 Months 2008 2008-01-31 Reclassified 2010-01-31 12 Months Total Revenue 2,266.5 1,657.1 1,305.6 1,076.8 748.7 Basic Normalized EPS (0.086) 0.495 0.649 0.358 0.157 4
Section (C) Fundamental Valuation (EBO) Inputs (provide below input values used in your analysis) EPS forecasts (FY1 & FY2): 1.31 and 1.50 Long-term growth rate: 27.85% Book value /share (along with book value and number of shares outstanding): Book value: $1,891,790,000 # of shares outstanding: 139,000,000 Book value / share: $13.61 Dividend payout ratio: 0% Next fiscal year end: January, 2013 Current fiscal month: 9 Target ROE: 20.98% Output Above normal growth period chosen: 7 years EBO valuation (Implied price from the spreadsheet): $15.02 Sensitivity Analysis EBO valuation would be (you can include more than one scenario in each of the following): 5
$15.02 if changing above normal growth period to 6 years $15.02 if changing growth rate from mean (consensus) to the highest estimate 40% $15.02 if changing growth rate from mean (consensus) to the lowest estimate 15% $27.18 if changing discount rate to 5% $15.02 if changing target ROE to 25% Section (D) Relative Valuation From the top panel Salesforce.com s numbers differ from their competitors by fairly large amounts. We can observe that the companies forward P/E seems to reflect the size of the firm in terms of market cap. The largest companies clearly have the lowest forward P/E. This result is because the smaller firms are expected to experience a higher rate of growth. The differences in PEG, P/S, P/CF and P/B follow the same pattern for the same reason. The implied prices derived from the various metrics ranges from about $6 to $415. By taking a closer look we see that this also reflect firm size and stage differences. The lowest implied prices come from companies that are in a maturity stage, and therefore we know that the actual price should be higher. The implied prices that are much higher than the actual price are implied from a company about 20% the size of Salesforce.com in terms of market cap. This company appears to be even earlier in its growth stage, so we would expect the implied price that it gives us to be higher than the actual. All of implied prices are fairly far off the actual price both currently and its 52 week high and low. The implied price from NetSuite Inc. s P/CF is closest at $129.96, but the high, low, and median from each valuation is outside of the stock s range. 6
From the bottom panel The value ratio seems to be the least relevant to the industry. It yields extremely low values as well as some negative numbers. The forward P/E also seems to be less reliable than the other metrics because it varies so much by the size of each firm. I believe that P/S is the most relevant valuation tool for this stock. We can see that this number should be adjusted to fit the size and stage of the company, but the ranges aren t as large and some of the numbers are relatively close to the 52 week range of this stock. Section (E) Revenue and Earnings Estimates HISTORICAL SURPRISES Sales and Profit Figures in US Dollar (USD) Earnings and Dividend Figures in US Dollar (USD) Estimates vs Actual Estimate Actual Difference Surprise % SALES (in millions) Quarter Ending Jul-12 728.32 731.65 3.33 0.46 Quarter Ending Apr-12 678.21 695.47 17.26 2.55 Quarter Ending Jan-12 620.40 631.91 11.51 1.86 Quarter Ending Oct-11 571.46 584.26 12.80 2.24 Quarter Ending Jul-11 528.83 546.00 17.18 3.25 Earnings (per share) Quarter Ending Jul-12 0.39 0.42 0.03 8.44 Quarter Ending Apr-12 0.34 0.37 0.03 8.28 Quarter Ending Jan-12 0.40 0.43 0.03 7.63 Quarter Ending Oct-11 0.31 0.34 0.03 10.00 Quarter Ending Jul-11 0.29 0.30 0.01 1.69 7
The recent trend for the company has been to surprise analyst estimates by achieving greater results. The surprises were much larger in general when it came to earnings estimates. The stock price responded to each of these instances by jumping up, as one would expect. CONSENSUS ESTIMATES ANALYSIS Sales and Profit Figures in US Dollar (USD) Earnings and Dividend Figures in US Dollar (USD) # of Estimates Mean High Low 1 Year Ago SALES (in millions) Quarter Ending Oct-12 36 776.33 785.00 773.00 713.42 Quarter Ending Jan-13 36 830.05 840.80 823.00 755.13 Year Ending Jan-12 43 2,247.18 2,293.00 1,847.61 -- Year Ending Jan-13 38 3,033.33 3,050.00 3,025.00 2,791.10 Year Ending Jan-14 38 3,832.53 3,963.42 3,505.00 3,421.01 Earnings (per share) Quarter Ending Oct-12 38 0.32 0.33 0.31 0.45 Quarter Ending Jan-13 38 0.40 0.44 0.37 0.52 Year Ending Jan-12 41 1.31 1.37 0.74 -- Year Ending Jan-13 39 1.50 1.55 1.47 1.75 Year Ending Jan-14 38 1.99 2.25 1.63 2.29 8
LT Growth Rate (%) 10 27.85 40.00 15.00 27.00 Difference between high and mean: sales: 2%, earnings: 4.6%, growth: 43.6% Difference between low and mean: sales: -17.8%, earnings: -43.5%, growth: -46.1% The differences are most notable for the current period and become less notable for future periods. The number of analysts providing a LT growth rate estimate is about 25% of the number of analyst providing sales and earnings estimates. CONSENSUS ESTIMATES TREND Sales and Profit Figures in US Dollar (USD) Earnings and Dividend Figures in US Dollar (USD) Current 1 Week Ago 1 Month Ago 2 Month Ago 1 Year Ago SALES (in millions) Quarter Ending Oct-12 776.33 776.33 776.29 771.70 713.42 Quarter Ending Jan-13 830.05 830.05 829.87 826.93 755.13 Year Ending Jan-12 2,247.18 -- -- -- -- Year Ending Jan-13 3,033.33 3,033.33 3,031.53 3,020.17 2,791.10 Year Ending Jan-14 3,832.53 3,832.35 3,831.30 3,810.66 3,421.01 Earnings (per share) Quarter Ending Oct-12 0.32 0.32 0.32 0.34 0.45 Quarter Ending Jan-13 0.40 0.40 0.40 0.40 0.52 Quarter Ending Jan-12 1.31 -- -- -- -- 9
Quarter Ending Jan-13 1.50 1.50 1.50 1.49 1.75 Quarter Ending Jan-14 1.99 1.99 1.99 1.98 2.29 The estimates are up for sales and down for earnings on the quarterly level. The differences are more apparent for earnings. Estimates for sales are down on the yearly level. ESTIMATES REVISIONS SUMMARY Last Week Last 4 Weeks Number Of Revisions: Up Down Up Down Revenue Quarter Ending Oct-12 0 0 2 0 Quarter Ending Jan-13 0 0 2 1 Year Ending Jan-12 -- -- -- -- Year Ending Jan-13 0 1 1 4 Year Ending Jan-14 1 1 4 1 Earnings Quarter Ending Oct-12 0 0 1 0 Quarter Ending Jan-13 0 0 2 0 Year Ending Jan-12 -- -- -- -- 10
Year Ending Jan-13 0 0 2 0 Year Ending Jan-14 0 1 2 1 The estimates have been decreased more often than increased. Most of these decreases were four weeks ago and in the last week it seems that there have been a few increases. I believe that the company has a good chance of falling short of analyst estimates. The most recent report, according to Morningstar had results below analyst estimates and several analysts point to a decrease in the growth rate and the competition increases and the potential for new customers decreases. Section (F) Analysts Recommendations ANALYST RECOMMENDATIONS AND REVISIONS 1-5 Linear Scale Current 1 Month Ago 2 Month Ago 3 Month Ago (1) BUY 15 15 15 14 (2) OUTPERFORM 19 19 18 18 (3) HOLD 3 3 3 3 (4) UNDERPERFORM 1 1 1 1 (5) SELL 4 4 4 4 No Opinion 0 0 0 0 Mean Rating 2.05 2.05 2.05 2.08 The recommendations have stayed pretty much the same over the last three months. Two new recommendations have been added since three months ago, a buy and an outperform. All of the analysts reports seem to believe that the company will continue to experience a high rate of growth. 11
Section (G) Institutional Ownership > 5% Ownership Holder Name % Outstanding Report Date Fidelity Management & Research Company 15 6/30/2012 Fidelity Growth Company Fund 7.6 8/31/2012 Sands Capital Management, LLC 7.4 06/30/12 Benioff (Marc R) 7.2 03/23/12 It would appear that overall institutions have been decreasing their ownership. However, the decrease has been so minor that it doesn t really tell us anything about changing expectations of the stock s performance. The stock has an extremely high percent of institutional owners, as it is more than the number of shares outstanding. The extent of the (>5%) owners is extremely large, over 35%. All of this could be a bullish indication of future stock price. 12
Section (H) Short Interest (two pages) Read more: http://www.nasdaq.com/symbol/crm/short-interest#ixzz29mfhla8p 13
From http://finance.yahoo.com/ Avg Vol Avg Vol Shares (3 month) (10 day) Outstanding Float 2,303,010 1,485,750 139,000,000 127,540,000 Shares Short Short Ratio Short % of Float Shares Short (Most recent date) (Most recent date) (Most recent date) (2 weeks prior) 12,720,000 (Sept 28, 2012) 6.4 (Sept 28, 2012) 11.90% (Sept 28, 2012) 14,200,000 The short interest of this stock has been rising in the last year and over the last few years. This is a fairly major bearish indicator for the stock. 14
Section (I) Stock Charts A three months price chart A one year price chart 15
A five year price chart We observe that the company s stock has outperformed in the long-term (five years) and in the three month period, but been average for 1 year. Sources: http://www.reuters.com/finance/stocks/financialhighlights?symbol=crm http://finance.yahoo.com/q/ks?s=crm+key+statistics MorniningStar Direct 16