Be wary of neighbor — his head’s in the cloud
October 17, 2012 5:32PM
Updated: November 19, 2012 3:13PM
Dear Mr. Berko: There is a company called Salesforce.com Inc. It’s in the cloud computing business, but I’m not certain what that is. Our neighbor, who we think is a shrewd investor and owns the stock, told us that cloud computing is the biggest new thing on the Internet and that Salesforce.com is the leader in this new industry. He says the company will make 32 cents this year and increase earnings 10 times to $3 in 2013. He believes that its stock will run from the current $158 and trade like Apple Inc. shares, at $642 a share, within a couple of years. Please tell me your thoughts. I’ll buy 100 shares if you agree.
— EH, Olathe, Kan.
Dear EH: Among the quickest ways to lose a good neighbor is to follow his financial advice. I don’t know where this guy got that $3 number, but he had to pull it out of a 10-gallon hat because there’s no way on God’s mangled planet that Salesforce.com can earn $3 next year or five years from now. This fellow is dangerous to your wealth, and I suggest that you move to another neighborhood.
Most civilians don’t know that Salesforce.com (CRM-$158) is a multibillion-dollar cloud computing enterprise that came public in 2004 at $11 per share. And I doubt there are 6,000 people in the great state of Kansas who’ve heard of Salesforce.com or know what it does. Cloud computing refers to Internet-based computing, storage and connectivity technology that delivers a prodigious variety of data management services (business, medical, social, sales, marketing, technical, etc.) through Internet browsers and mobile devices. CRM has more than 100,000 customers in 70 countries. Since going public eight years ago, revenues have exploded, from $176 million to perhaps $3.5 billion in 2013. However, profit growth has been niggardly, as management seems more inclined to grow revenues and hang the costs than earn a profit. CRM lost money on $2.2 billion in revenues last year, will lose money on $3 billion in revenues this year but could earn 60 cents a share in 2013 on $3.5 billion in revenues. Today CRM trades at 250 times 2013’s projected earnings of 60 cents. And at that multiple, I wouldn’t touch this thing with a toxic barge pole, a 10-foot dipstick or a Gosterium tractor beam. Nothing, in my opinion, is worth 250 times earnings — not even my favorite blue-ribbon Texarkana chili, which takes the Hibbing brothers in Hogeye, Texas, four days to brew.
Today is my day for guarantees, and I guarantee that if your neighbor is correct and CRM earns $3 a share in 2013 (though he may have forgotten to pay the rent on his brain bill), the stock won’t trade at Apple’s $642 a share. And I’m going to give you another guarantee: CRM will not earn $3 next year or the year after or even the year after. For your information, Apple — the shares of which are worth more than General Motors, IBM and 3M combined — is the world’s largest maker of computers and peripheral products. Analysts and pundits reckon that Apple will earn $52 a share next year. Apple shares trade at $642, so its price-earnings ratio is 13-to-1.
Salesforce.com will not earn $52 a share unless it takes over the world, and that’s not going to happen, thanks to SEAL Team 6. But what will happen is, as CRM’s earnings increase (and they will), its P/E will decline, and that’s another guarantee. So in five years (note that I said five years), if CRM’s earnings reach $3, its P/E will fall to 60-to-1, and the stock could trade at $180. And in another three or four years, if CRM earns $5 a share, its P/E may fall to 40-to-1, and the stock price might trade at $200. Stop daydreaming, and tell your neighbor I said CRM is a stinky investment.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at firstname.lastname@example.org.