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Salesforce.com Tempts the Bears

October 31, 2011 | About:

Salesforce.com (NYSE:CRM) is one of the most shorted shares on the stock market. Many hedge funds despise the high flier with a trailing P/E of 658. For example, Whitney Tilson recently gave a presentation on the short thesis of CRM.

However, despite the obvious flaws at CRM, shorting CRM stock might be a risky endeavor.

Short interest in Salesforce.com has skyrocketed in recent months. Short interest grew another 3.3% from 10.95 million shares to 11.32 million shares. The shares usually only trade 1.5 million shares per day and 10X that number are currently short. Thus, we can expect legendary short squeezes in CRM stock.

Secondly, it may take a few quarters for competitive pressures to build up. Oracle's acquisition of RightNow means that Oracle is directly competing with Salesforce.com. Many hedge funds see the competition coming from Oracle and SAP. However, it is unknown when the competition will stunt sales growth. It could be a few quarters before the sizzling growth rate at CRM slows.

Finally, all of the valuation metrics that fund managers like Tilson have identified are widely known.

It is obvious that the company has forward multiple of 107 times its pro forma 2012 earnings estimates of $1.30. Investors and traders are prepared to pay any price for a piece of the Salesforce.com growth story. In other words, over valuation has not mattered in several years. Why would the valuation metrics apply in the short run.

For CRM stock to plunge there must be a catalyst that causes the momentum money to flee. The most likely scenario is a lack of sales growth due to strong competition. However, until the competition puts a dent in the sales growth figures, CRM stock may continue to rise and further frustrate short sellers.

Rating: 3.0/5 (6 votes)


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