Is salesforce.com the Perfect Stock?
Aug 23rd 2011 10:04AM
Updated Aug 23rd 2011 10:06AM
Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if salesforce.com (NYS: CRM) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
- Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
- Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at salesforce.com.
What We Want to See
Pass or Fail?
|Growth||5-year annual revenue growth > 15%||37.3%||Pass|
|1-year revenue growth > 12%||33%||Pass|
|Margins||Gross margin > 35%||79.4%||Pass|
|Net margin > 15%||1.5%||Fail|
|Balance sheet||Debt to equity < 50%||37.4%||Pass|
|Current ratio > 1.3||0.61||Fail|
|Opportunities||Return on equity > 15%||2.2%||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current yield > 2%||0%||Fail|
|5-year dividend growth > 10%||0%||Fail|
|Total Score||4 out of 9|
Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful because of negative earnings. Total score = number of passes.
With just four points, salesforce.com falls well short of perfection. The cloud computing stock is in just the right tech niche, but consistent concerns about overvaluation and competitive advantage plague the shares.
Investors know salesforce.com best for its customer relationship management software, which competes against Microsoft's (NAS: MSFT) Dynamics suite. But as fellow Fool Tim Beyers points out, salesforce.com is more than just its CRM software. While Microsoft and fellow competitors SAP (NYS: SAP) and Oracle (NAS: ORCL) aim their business at larger customers that can afford to set up their own infrastructure software hosing, salesforce.com aims itself at smaller customers that would prefer to rent that infrastructure and utilize the bevy of apps created for salesforce's platform.
How salesforce.com succeeds at competing with bigger players is by spending a lot of money on sales and marketing. The company spends nearly half of its revenue on that area, which is pretty close to smaller players in the industry such as NetSuite (NYS: N) and Qlik Technologies (NAS: QLIK) but is far less than what bigger companies like Oracle spend.
In its most recent quarter, salesforce.com reported strong earnings and revenue growth and guided upward for the third quarter as well. Although the company reported a GAAP loss, adjusted earnings came in at $0.30 per share. With the stock trading above $110, however, it'll take a lot more growth before value-oriented investors feel comfortable with the stock.
As with many high-growth stocks, expensive valuations and a lack of dividends keep salesforce.com from coming close to perfection. If the cloud computing industry reaches its full potential, though, the company might well look a lot more like a perfect stock at some point in the future.
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.
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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.
At the time this article was published Fool contributor Dan Caplingerdoesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Oracle, Qlik Technologies, and Microsoft. Motley Fool newsletter services have recommended buying shares of Qlik Technologies, Microsoft, and salesforce.com, as well as creating a bull call spread position in Microsoft. A separate service has recommended shorting Salesforce.com. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.
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