Speaking of a stupid market, there’s a company that reported yesterday after the close. Before I tell you the name, let me give you some facts and let’s see what you think it’s worth:
It had Q4 net income of $11 million ($0.08/share, down 50% YOY) and 2010 net income of $64 million ($0.47, down 25%), and gave guidance for next quarter of a small loss ($0.01-$0.02) and for next 12 months of $0.08-$0.11, down another 75%+ from the last 12 months. Even using the company’s pro-forma earnings (which exclude massive “stock-based expense”), last year’s earnings were $1.22, up 6% YOY, and the forecast of the next 12 months is $1.35-$1.38.
On the plus side, the company’s customers love the product and it is growing rapidly: revenues were up 29% and 27% in the last quarter and year, respectively, with TTM revenues of $1.7 billion. Also, operating cash flow was $166 million last quarter and $459 million last year, vs. only $31 million and $91 million, respectively, in cap ex. Thus, free cash flow last quarter was $135 million, equal to 30% of revenues ($457M in Q4), so at least on this metric, it appears to have high margins. Finally, the company has $1.4 billion in cash, short-term marketable securities, and noncurrent (long-term) marketable securities (equal to $10/share), with no debt.
So how much might this rapidly growing, high-margin (maybe) company be worth? Before you answer that, you might want to know that the gorilla of the industry, with more than 40x this company’s sales, is making a big push with a directly competitive product which is now available in 40 markets and 41 languages at ½ to 1/3 of the price.
Also, the company gives out stock options by the bushel, such that the share count rose 7.3% YOY last quarter, and the CEO, through 12/31/10, had an automatic selling program in place and was selling stock every day the market was open valued at more than $1.3 million (more the double the company’s total profits per day). Overall, the company has the second-highest insider selling of ANY company in the U.S. market.
So what’s it worth? Call me old school, but I think GAAP earnings matter and I think ALL compensation is an expense, whether it’s in the form of cash or stock options. But the company basically has no GAAP earnings to speak of, nor is it expecting any this year, so let’s give the company every benefit of the doubt and use its pro-forma earnings: $1.22 trailing and $1.38 (the high end) for this year (up a mere 13%). What would be an appropriate multiple? 20x? 30x? Using 30x x $1.38 = $41.40 plus $10 in cash = $51.40. As I write this, the stock is nearly 3x this at $141.80, giving it a market cap of $20 BILLION and EV of $21.4B.
Let’s be even more generous and use free cash flow, and let’s annualize $135M of FCF in Q4, so that’s $540 million. Put a 20 multiple on this and that’s $10.8 billion, plus cash equals $12.2 billion, just over half of the current EV.
The company, of course, is Salesforce.com, which is one of the leading stocks in the cloud computing bubble. Ferris, in his newsletter, Extreme Value, summarizes it nicely:
Aside from the hypergrowth that has long since disappeared, Salesforce's irrationally exuberant price tag also seems to assume zero competition. But hypergrowth is gone precisely because competitors are eating into Salesforce's market share.
It's no mystery what's bringing the competition out of the woodwork: Salesforce's fat gross margins. The company gets 90%-plus of its revenue from subscriptions and support. That part of the business earns 85% gross margins. (Another revenue source, called professional services, is less than 10% of sales and loses a couple million dollars every year.) Everybody in the industry is after a piece of that recurring subscription revenue at 85% margins. Big margins attract large, well-financed competitors the way drug rehab centers attract celebrities. In fact, Salesforce has attracted the biggest, best-financed, most ruthless competitor in the industry… the 800-pound gorilla of global software. Microsoft just announced plans to eat Salesforce's lunch. A couple weeks ago, Microsoft said its CRM software, Dynamics CRM, was available in 40 markets and 41 languages. It also said it would offer Salesforce and Oracle CRM customers low promotional pricing for the first 12 months if they agreed to sign a one-year contract by June 30. Microsoft is charging $34 per employee per month, versus Salesforce's Professional edition at $65 per employee per month and Enterprise's edition at $125 per employee per month. Oracle's CRM on Demand starts at $75 per month. If someone told me I was being undercut by the makers of Microsoft Office, I'd need two things immediately: Plan B and a clean pair of shorts
Microsoft Dynamics CRM is integrated with Microsoft Outlook, the hugely popular email application, and Microsoft Office. The latest version of Office is the fastest-selling one ever, and there's now a cloud version called Office 365. And while Salesforce might have a lot of valuable applications, and might still have a more robust and popular CRM product than Microsoft, it doesn't have Microsoft Office.
In addition to Dynamics CRM, Microsoft has done several cloud computing deals lately. It recently signed a five-year, $100 million cloud computing deal with the New York state government. The contract covers 120 departments and 100,000 personal computers. Microsoft did a similar agreement with the California state government, covering 200,000 employees. It signed a deal with the Minnesota state government covering 33,000 employees, and another with DuPont.
Other large firms are in cloud computing, too… …If you still like Salesforce, know this: its management hates it. Salesforce CEO Marc Benioff sold 10,000-plus shares of stock every trading day in 2010. He's not the only one selling, either. According to market research firm Vickers Weekly Insider, Salesforce is the second most actively sold stock by insiders. In the past 90 days, insiders dumped over 583,000 Salesforce shares in 128 separate transactions (exceeded only by cell phone provider MetroPCS Communications, with 350 insider sell transactions).
We are short this stock, and we have been wrong so far (though not nearly as painfully as NFLX, as we started shorting it more recently and it’s not one of our largest shorts today because we’re waiting for the fundamentals to crack). If we’re wrong on this, we REALLY want to know it, so please email me if you can make a reasoned case that this stock is a bad short.
Disclosure: None
It had Q4 net income of $11 million ($0.08/share, down 50% YOY) and 2010 net income of $64 million ($0.47, down 25%), and gave guidance for next quarter of a small loss ($0.01-$0.02) and for next 12 months of $0.08-$0.11, down another 75%+ from the last 12 months. Even using the company’s pro-forma earnings (which exclude massive “stock-based expense”), last year’s earnings were $1.22, up 6% YOY, and the forecast of the next 12 months is $1.35-$1.38.
On the plus side, the company’s customers love the product and it is growing rapidly: revenues were up 29% and 27% in the last quarter and year, respectively, with TTM revenues of $1.7 billion. Also, operating cash flow was $166 million last quarter and $459 million last year, vs. only $31 million and $91 million, respectively, in cap ex. Thus, free cash flow last quarter was $135 million, equal to 30% of revenues ($457M in Q4), so at least on this metric, it appears to have high margins. Finally, the company has $1.4 billion in cash, short-term marketable securities, and noncurrent (long-term) marketable securities (equal to $10/share), with no debt.
So how much might this rapidly growing, high-margin (maybe) company be worth? Before you answer that, you might want to know that the gorilla of the industry, with more than 40x this company’s sales, is making a big push with a directly competitive product which is now available in 40 markets and 41 languages at ½ to 1/3 of the price.
Also, the company gives out stock options by the bushel, such that the share count rose 7.3% YOY last quarter, and the CEO, through 12/31/10, had an automatic selling program in place and was selling stock every day the market was open valued at more than $1.3 million (more the double the company’s total profits per day). Overall, the company has the second-highest insider selling of ANY company in the U.S. market.
So what’s it worth? Call me old school, but I think GAAP earnings matter and I think ALL compensation is an expense, whether it’s in the form of cash or stock options. But the company basically has no GAAP earnings to speak of, nor is it expecting any this year, so let’s give the company every benefit of the doubt and use its pro-forma earnings: $1.22 trailing and $1.38 (the high end) for this year (up a mere 13%). What would be an appropriate multiple? 20x? 30x? Using 30x x $1.38 = $41.40 plus $10 in cash = $51.40. As I write this, the stock is nearly 3x this at $141.80, giving it a market cap of $20 BILLION and EV of $21.4B.
Let’s be even more generous and use free cash flow, and let’s annualize $135M of FCF in Q4, so that’s $540 million. Put a 20 multiple on this and that’s $10.8 billion, plus cash equals $12.2 billion, just over half of the current EV.
The company, of course, is Salesforce.com, which is one of the leading stocks in the cloud computing bubble. Ferris, in his newsletter, Extreme Value, summarizes it nicely:
Aside from the hypergrowth that has long since disappeared, Salesforce's irrationally exuberant price tag also seems to assume zero competition. But hypergrowth is gone precisely because competitors are eating into Salesforce's market share.
It's no mystery what's bringing the competition out of the woodwork: Salesforce's fat gross margins. The company gets 90%-plus of its revenue from subscriptions and support. That part of the business earns 85% gross margins. (Another revenue source, called professional services, is less than 10% of sales and loses a couple million dollars every year.) Everybody in the industry is after a piece of that recurring subscription revenue at 85% margins. Big margins attract large, well-financed competitors the way drug rehab centers attract celebrities. In fact, Salesforce has attracted the biggest, best-financed, most ruthless competitor in the industry… the 800-pound gorilla of global software. Microsoft just announced plans to eat Salesforce's lunch. A couple weeks ago, Microsoft said its CRM software, Dynamics CRM, was available in 40 markets and 41 languages. It also said it would offer Salesforce and Oracle CRM customers low promotional pricing for the first 12 months if they agreed to sign a one-year contract by June 30. Microsoft is charging $34 per employee per month, versus Salesforce's Professional edition at $65 per employee per month and Enterprise's edition at $125 per employee per month. Oracle's CRM on Demand starts at $75 per month. If someone told me I was being undercut by the makers of Microsoft Office, I'd need two things immediately: Plan B and a clean pair of shorts
Microsoft Dynamics CRM is integrated with Microsoft Outlook, the hugely popular email application, and Microsoft Office. The latest version of Office is the fastest-selling one ever, and there's now a cloud version called Office 365. And while Salesforce might have a lot of valuable applications, and might still have a more robust and popular CRM product than Microsoft, it doesn't have Microsoft Office.
In addition to Dynamics CRM, Microsoft has done several cloud computing deals lately. It recently signed a five-year, $100 million cloud computing deal with the New York state government. The contract covers 120 departments and 100,000 personal computers. Microsoft did a similar agreement with the California state government, covering 200,000 employees. It signed a deal with the Minnesota state government covering 33,000 employees, and another with DuPont.
Other large firms are in cloud computing, too… …If you still like Salesforce, know this: its management hates it. Salesforce CEO Marc Benioff sold 10,000-plus shares of stock every trading day in 2010. He's not the only one selling, either. According to market research firm Vickers Weekly Insider, Salesforce is the second most actively sold stock by insiders. In the past 90 days, insiders dumped over 583,000 Salesforce shares in 128 separate transactions (exceeded only by cell phone provider MetroPCS Communications, with 350 insider sell transactions).
We are short this stock, and we have been wrong so far (though not nearly as painfully as NFLX, as we started shorting it more recently and it’s not one of our largest shorts today because we’re waiting for the fundamentals to crack). If we’re wrong on this, we REALLY want to know it, so please email me if you can make a reasoned case that this stock is a bad short.
Disclosure: None
