Salesforce.com: How a $150 Market Price Could be Justified

Salesforce.com (NYSE:CRM) is a maker of Customer Relationship Management (CRM) software delivered on-demand through the “cloud” and competes with other CRM players like SAP (NYSE:SAP), Oracle (NASDAQ:ORCL) and Microsoft (NASDAQ:MSFT).  The company’s stock has risen from lows of about $28 in early 2009 to about $150 today.  With a P/E ratio exceeding 250x, many are arguing that the stock is grossly overvalued.

We’ve launched coverage of Salesforce.com with a $128 Trefis price estimate, 17% below the current market price of $150.  Although our valuation estimate is below the current market price, below we highlight two long-term developments that could present upside to our estimates and justify the market price.

1)  +$16 if Salesforce CRM Market Share Rises to 30%

CRM software like that offered by Salesforce helps companies better manage customer data and information, which helps those companies to better serve their customers and increase sales.  We estimate that Salesforce’s core CRM software business accounts for 63% of the Trefis price estimate for Salesforce’s stock.

We estimate that Salesforce has increased its CRM software market share from around 7% in 2006 to nearly 13% in 2009, and we expect it to continue to increase to around 25% by the end of Trefis forecast period.  Salesforce has benefited in recent years from the shift in demand from on-premise CRM software to on-demand (cloud-based) CRM software.

We expect the CRM software market to continue to shift towards cloud-based software which will benefit Salesforce and help it capture additional market share.  However, Salesforce’s primary competitors (SAP, Oracle and Microsoft) are expected to increase their presence in the cloud-based CRM market over time and this can ultimately slow down the rate at which Salesforce gains share.

By modifying the forecast shown above, you can see how there could be about $16 (13%) of upside to the Trefis price estimate if Salesforce were to reach 30% market share in the CRM software market by the end of our forecast period instead of the 25% that we currently forecast.  On the other hand, there would be downside of about $28 (22%) to our estimate if Salesforce’s CRM market share were to remain flat over the forecast period.

2)  +$9 if Salesforce’s Share in Cloud Computing Market Reaches 1%

In recent years, Salesforce has been branching out from delivering only CRM software through the cloud to delivering other cloud-based software services.  The broader cloud computing market presents a long-term opportunity for Salesforce as IT departments leverage cloud-based software instead of investing in additional hardware and on-premise software.

The cloud computing market consists of Software as a Service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service (IaaS).  Salesforce offers Force.com, a development platform and infrastructure for corporate IT departments and independent developers to build business applications. It provides an environment to develop custom applications beyond CRM applications.

Furthermore, the company recently launched Database.com as a separate database on-demand offering.  The database software market is dominated by Oracle with about 50% market share of the roughly $7 billion of new database software licenses sold annually.

We estimate that the cloud-computing market (excluding cloud-based CRM software) stands at about $65 billion and that this could grow to more than $300 billion by the end of our forecast period.  We believe that Salesforce will have a small but growing share in this very large market as it continues to launch new cloud-based software services.  By modifying the forecast below, you can see how there could be a $9 (7%) upside to the Trefis price estimate if Salesforce were to capture 1% share in the broader cloud-computing market (excluding CRM) by the end of our forecast period.

These two scenarios combined would lead to a Trefis price of about $151, just slightly above the current market price.  If you think these scenarios are likely, then Salesforce may not be overvalued at all.

You can see our complete analysis of Salesforce.com’s stock here including key drivers such as:

• Salesforce’s Share in the Customer Relationship Software
• Global Customer Relationship Software Market