Salesforce.com (NYSE:CRM) will report its fiscal year Q2 earnings on August 18th and we take a look at some of the key items driving results this quarter. Salesforce.com has been the leader in the on-demand CRM (customer relationship software) market and derives a majority of its revenues from its cloud CRM offerings. We estimate that Salesforece.com currently has close to 15% market share of the CRM market in which it competes with giants like SAP (NYSE:SAP), Oracle (NASDAQ:ORCL), Microsoft (NASDAQ:MSFT) and IBM (NYSE:IBM). It has also launched some new cloud based products like Force.com, Database.com, AppExchange and Chatter that we expect to gain larger market share in the non-CRM cloud computing market, which accounts for nearly 30% of our price estimate.
We currently have a $122 Trefis price estimate for Salesforce.com, which implies around 10% downside from the current market price.
CRM Market Share
Cloud based CRM software is the biggest driver for Salesforce.com stock. It comprises more than 60% of the Trefis price estimate for Salesforce.com. We expect the global CRM market to expand to around $22 billion by the end of our forecast period. With more players entering this market, Salesforce.com’s market share may decline as opposed to our estimates. However, we think it’s unlikely as Salesforce.com holds a majority share of the cloud based, on-demand CRM market that drives most of its growth as companies move from on-premise CRM solutions to on-demand ones.
New Cloud Products and Offerings
The other major drivers for Salesforce.com’s growth are its non-CRM cloud based offerings like the Force.com, Database.com and AppExchange.
Salesforce.com currently has a 0.26% share of the entire cloud computing market excluding CRM offerings. This is a huge market that we expect to be worth more than $300 billion by the end of the forecast period. How Salesforce.com goes about trying to capture this market will determine its revenue growth in the future. Besides rolling out its own products, Salesforce.com has also been on a buying spree acquiring companies like Jigsaw, Heroku, Etacts, Dimdim, Radian 6, etc., which should help it gain additional market share in the global cloud computing market.
Rising Operating Expenses
Though Salesforce.com enjoys large gross margins, its rising operating expenses have been a cause for concern over the last few quarters. Though the revenue growth has been impressive, the operating expenses – especially its R&D and Sales & Marketing expenses – have been rising faster. These expenses may be necessary to continue its rapid expansion and growth, but eventually they will have to be pared down relative to its revenues.
