Thursday, October 9, 2008
Salesforce.com goes down like a lead zeppelin
It is quite amazing what can happen in one month. Salesforce.com has plunged from $58.00 down to $36.50. This is a drop of 37%. In comparison, Microsoft and Sage have dropped around 15%. As the winds change, so do the financial advisors with recommendations of 'Buy' quickly switching to 'Underperform' (http://www.forbes.com/feeds/ap/2008/10/07/ap5521900.html )
What will happen now? My take is it has not yet reached the basement.
P/E ratio is still obscene (133 if we believe msnmoney, over 300 by my calculations).
Revenue growth is, in all likelihood, going to be hit by the fun and games that is the global slowdown therefore any expectation of future earnings is going to dry up. This leaves us with the tangible book value of $3.55. Yes, I am saying that the Salesforce.com share price could drop to the price of a bottle of beer, although the die-hards will probably keep it above $20.
I think it would also be fair to question whether Salesforce.com are going to make that magic $1b this year that Benioff keeps banging on about. Anything less than 30% revenue growth and it ain't going to happen. Good luck with that.
However, the bigger problem for SalesForce is their growth is funded through borrowing, or more precisely, share issues. Based on my numbers, their sustainable growth rate (measure of how much a company can grow without borrowing) is shy of 5%. To achieve the double-digit growth rate of the past, SalesForce will be either issuing more shares or borrow money. Given no-one is lending money I'm guessing more shares will hit the cautious market.