Salesforce.com (CRM, Financial)'s market capitalization is looking to push past the $100 billion mark as the company exeeds earnings expectations and predicts an even stronger-than-expect 2018. This is an incredible company at the cornerstone of big data and digital transformation, founded almost 20 years ago, but it also shows a major problem brewing in Silicon Valley. Most technology companies are overvalued. The ones that aren’t have such high market capitalizations that it's going to very hard to rationalize continued market outperformance.
Here are the important numbers from Tuesday’s earnings report.
GAAP revenue for the first quarter of fiscal 2019: Salesforce reported $3.01 billion, up 25% from the year before. For the year, Salesforce expects $13.08 billion to $13.13 billion. Analysts are expecting $12.75 billion. Salesforce reported earnings per share for the quarter of 74 cents, helped by new mark-to-market accounting of the company’s investments, required by ASU 2016-01, which benefited GAAP diluted earnings per share by 25 cents. Guidance for the year has Salesforce expecting $2.29 to $2.31 of non-GAAP earnings per share versus 49 cents to 51 cents in GAAP earnings per share.
The company is a cash behemoth, generating close to $1.5 billion in operating cash quarterly and seemingly generating a good junk from its investment portfolio as well.
Salesforce.com pioneered the Software as a Service (SaaS) industry, and has created products that span key pillars of customer relationship management, or CRM, that allows for rapid scalable deployments, real-time updates and lower operating costs. All those free trials end up converting pretty nicely over the long term and with the high switching costs, Salesforce will likely keep growing. And, obviously, the CEO and co-founder Marc Benioff continues to tout the amazing results across the media.
On the call Benioff said, “Only Salesforce can deliver a highly personalized engaged B2B and B2C customer experiences, powered by the world's number one CRM customer success platform, across sales, across service, across marketing, commerce, communities, analytics and even application development through our platform. Only Salesforce is giving customers an intelligent 360 degree view of their customer.”
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But growth alone should not be the benchmark for high valuations, and that’s where inflation will win sooner rather than later. Even if these numbers hold for the company’s fiscal 2019, it will generate $1.6 billion in non-GAAP earnings, meaning that investors will be paying 62.5 times these forward expectations. Non-GAAP financial measures are used by companies to close the gap between corporate reporting that is standardized under GAAP accounting rules and figures that are more closely tailored to a particular industry or circumstance. If valued at GAAP numbers, the stock looks absolutely stupid to buy because no matter how much it grows, you wouldn’t live to see anywhere close to payback on your investment as a private company. (Other big technology companies like Apple and Microsoft only use GAAP.)
Of course, the amount of fiat money in the system is one reason why the market is pricing stocks like CRM with absolutely ridiculous valuations and the money supply will only continue to grow through the next correction. Money is a commodity, but fiat currency can be created on a whim (like aluminum) and has become worth less and less over time. While we use a fancy term for it called "inflation,"Ă‚ Warren Buffett was wrong in his 1977 article about inflation. Inflation doesn't swindle money away from stock investors. It's a major reason why stocks continue to be a better investment than most other assets and why stock values continue to rise as they do.
It’s just most apparent in the market value of Salesforce. The company might meet its goal of $20 billion in sales by 2022, which might mean $2.6 billion in non-GAAP earnings for the company, but that’s still a 38x forward multiple and four years away. A correction, maybe even another recession, is coming and while Salesforce has a strong moat, the stock price will fall faster than others as investors pull cash out of the market. If the price-earnings ratio gets into the 20x range, I’d be a buyer.
Disclosure: I am not long/short CRM.
