Salesforce.com Fails to Clamp Down on Expenses, Overshoots $120 Fair Value

+87.74%
Upside
159
Market
299
Trefis
CRM: Salesforce logo
CRM
Salesforce

Salesforce.com (NYSE:CRM) reported its earnings for Q4 FY12, with its revenue reaching a record high of $632 million, up 38% year-over-year. Its full year revenue jumped to $2.27 billion. [1] However, it reported a net loss yet again, due to its rising expenses. Its sales and marketing expenses were close to 52%, and remain one of the major factors affecting its stock value. However, its revenue growth is impressive. We expect Salesforce.com to continue its upward march in terms of revenue as it continues to add new customers and launches new cloud-based products, but the rising expenses continue to be a concern. Salesforce.com competes primarily with SAP (NYSE:SAP), Oracle (NASDAQ:ORCL) and Microsoft (NASDAQ:MSFT) in the cloud-based enterprise software market.

See our full analysis for Salesforce.com

We have a $122 Trefis price estimate for Salesforce.com, which stands nearly 15% below its market price.

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CRM and other cloud offerings continue to attract customers

Salesforce.com has continued to add new customers at a scorching pace which has resulted in a rapid rise in overall revenue. It entered new deals with the likes of Dell and Deloitte in 2011, which should help it increase its market share even further. We expect it to continue to expand its market share of the customer relationship software market throughout the forecast period, as cloud-based software gains traction in the enterprise and with small businesses.

You can check out the impact of Salesforce.com’s market share in the CRM market on its value using this chart.

Salesforce.com also launched a series of new cloud-powered apps like Force.com, AppExchange, Database.com, Heroku, Data.com, Desk.com and the Radian 6 Social Marketing Cloud, which continue to generate increasing amounts of revenue for the company.

Salesforce.com need to control rising operating expenses

While the revenue growth is definitely impressive, Salesforce.com continues to post losses due to a greater increase in its operating expenses. It remains to be seen if its revenue growth will continue even after it reduces its marketing spend, which currently stands at around 52% of its overall revenue.

We expect its operating expenses to decline going forward. However, there could be a significant downside to its value if Salesforce.com is unable to control its spending. You can check out the impact of its greatest expense – SG&A – on its price estimate using this chart.

Understand How a Company’s Products Impact its Stock Price at Trefis

Notes:
  1. Salesforce.com Announces Fiscal 2012 Fourth Quarter and Full Year Results, Press Release []