Salesforce.com (CRM) Stock Evaluation
The state of the company’s financial growth is strong. Since the company went public in 2004, Salesforce.com has been able to consistently grow its top and bottom line. For simplification, the Total Revenue and Net Income are as follows (all numbers are in thousands):
Simplified Income Statement
Year 2006 2005 2004
Total Revenue 309,857 76,375 96,023
Gross Profit 240,731 142,921 78,750
Net Income 28,474 7,346 3,514
Revenue growth has been impressive. At the end fiscal year 2006, the company was able to achieve almost 400 percent revenue growth compared to 2005. This growth is staggering and represents a growth market. However, the revenue growth is offset by high operating expense, which resulted in only $28.5 million in actual profit for 2006.
The closing price of Salesforce.com (CRM) stock on October 13, 2006 is $40.98. At current price, the stock is trading with a P/E or 254.53 and a market value of $4.6 billion. By all valuation measurements, this stock is currently overvalued as the market value dwarf the book value. The book value since 2004 is below:
Simplified Book Value
Year 2006 2005 2004
Book Value 196.3 M 145.1 M (46.2) M
Investor should be careful about buying positions of CRM. The valuation of this stock represents a very high expectation. Even if the company is able to meet its earning guidance, this might not be sufficient to sustain its current value. With high valuation, this company needs to handily beat its forecast. While the on-demand CRM market is a growth market, the current valuation leaves no room for errors. Salesforce.com stock is risky at the current level.
