Market Overview

Salesforce Plummets 12% on Concerns of Slow Growth


By Parkin Furia

Benzinga Staff Writer (NYSE: CRM) is an information technology service provider to various businesses around the globe. It provides solutions for customer relations and management. Currently, the company has a market capital of $15.27 Billion and has more than 5000 employees. It has operations in more than 10 countries around the world and the company's client list includes Starbucks (NASDAQ: SBUX), DELL (NASDAQ: DELL) and NBCUniversal.

The company was founded by Mark Benioff and Parker Harris in 1999 and is located in San Francisco, California. Mark Benioff is an alumni of University of Southern California and was Senior Vice President at Oracle before he founded along with Parker Harris, who was Vice President at Left Coast Software before he joined entered the business with providing software technology platforms and it grew rapidly during the early 2000s when information technology was growing exponentially. Over the period of time, it made acquisitions increasing the different products and services provided, giving them entry into different industries and businesses.

The company, along the way, ventured into a CRM business called Salesforce CRM which provides subscribers to store, analyze and share data and also helps businesses manage their accounts, sales data and marketing campaigns. It then started with providing cloud computing services under the brand names Sales Cloud and Service Cloud. It has various number of cloud products like Chatter Mobile and Chatter Plus. CRM has been a forerunner of cloud computing services and has been competing well with IT giants like ORACLE (NASDAQ: ORCL) and MICROSOFT (NASDAQ: MSFT) to maintain its leadership in the cloud services space.

The company announced its financial results for Q3 on Thursday November 17, 2011. It posted positive quarterly revenue of $586 million, a 36 percent increase year-on-year. It also had an operating cash flow of $729 million, up 74 percent year-on-year . The diluted earnings per share were up just 6 percent year-on-year, against the market expectations of double digit growth in that number.

The company is in a highly competitive business and is expected to grow at a very fast pace. Companies in the technology business have been more volatile than normal, which can be explained by the virtual nature of the business. Investors in these businesses expect to see high growth in a short span of time because of its working model; the capital required is considerably less and the customer base is extremely large. That is exactly what investors at expect too.

Though the company has posted good numbers last quarter, it has shown a slowdown in growth. It has posted fairly low growth numbers which is a sign of concern for investors. Also, the cash flows reported by the company do not look like that of a $15 billion company. With earnings of $0.34 per share for the quarter, it is trading at around 70 times its earnings which is very high. The S&P 500 index is currently trading at around 14 times its earnings while CRM's peers are trading at about 19 times their earnings . All this explains the plunge the CRM stock price took on Friday.

Moreover, the company expects the total revenue for the last quarter of 2011 to be around $624 million, just a 6 percent increase over the last quarter. This is low as the company's revenue has been growing at 9 percent per quarter over the last four quarters. Also, the company's profit margins and operating margins have decreased. The company had spent cash recently to buy other businesses, but these acquisitions have failed to add to the company's operating profits to a large extent.

The company will have to consistently post high growth numbers to justify its high valuation. Considering that the margins are narrowing, it is going to be tough for to maintain a high growth rate. The company has to also provide a higher return on equity to the investors to gain back their confidence.

The cloud computing market is expected to be worth $150 billion by 2014 and considering has about 20% of the market share at present, it is expected to grow, but the pace of its growth will define its valuation.

Posted-In: Microsoft Oracle S&P 500 SalesforceEarnings Markets


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