Stocks with high multiples — meaning high P/E ratios — have been getting bashed in the stock marekt lately. Salesforce.com (CRM) is one of them
Salesforce.com runs a salesforce management system on “the cloud”, and its software is some of the best at helpsing salesmen manage their clients and prospects. CRM’s sales have zoomed from $2 billion in 2012 to $3 billion last year and are expected to hit $4 billion this year (as well as $5 billion next). Unfortunately the company’s profits haven’t tracked its revenue growth. CRM made $0.34 in 2012, $0.41 in 2013, but then profits slipped back down to $0.35 last year.
Investors don’t seem to mind the fact profits aren’t coming in. The stock continuously climbs, even if profit growth is negative (see the one year chart below). The Ten Year Chart shows a better view of the stock’s performance during the long-run. .
CRM has had a too-high-to-buy P/E for years, and we should consider dips to be buying opportunities — even if the P/E seems to be too much.
One Year Chart
Notice in this one-year chart CRM made a yearly low around $38 a share. From there it almost doubled. When I look back to my 2013 Q2 research (not shown) done on 6/18/13 CRM was $38, the P/E was 93 and -9% profit growth was expected the next qtr. Still, from there, the stock almost doubled. Oh, and at the time annual profits were expected to be flat year-over-year. No growth for 93x earnings and still CRM shot higher.
The data in these charts and tables was compiled on 3/28/14 when CRM was $56. Today the stock is $49. You can see the beginning of the current correction in this chart, and the stock’s continued to fall. Now let’s see where I think we should buy.
Fair Value
It’s tough to value CRM on a P/E basis. But at 75 times earnings my Fair Value is $37. We are in a correction and CRM has already dropped from $66 to $49, asking for an additional 25% price cut may be too much to ask for. But if it happens, you’de be getting a great company at a deep discount.
Sharek’s Take
Salesforce.com is really a must own stock for growth stock investors, the trouble is the stock’s always too high to get into. With the market in a correction now — and high multiple stocks like CRM taking a beating — we might have a chance to get this stock at a lower price. Unfortunatly my wish price of $37 seems too low and I doubt we will be able to get in that cheap. But you never know.
View the Earnings Table here. View the Profit History here.View the Ten Year Chart here.
