Salesforce.com: Red Flags and Hyperbole (Bret Jensen...Seeking Alpha)

Bret Jensen
Seeking Alpha

Earnings Call Synopsis
It is always fun to listen to these conference calls. Marc Benioff has to be the biggest master of hyperbole this side of Cramer. He is always good for at least a few “delighteds,” one or two “amazings,” and assorted other over the top terms like “revolutionary.” On Salesforce.com's (CRM) latest call he didn’t disappoint. To be fair, he has some decent things to talk about.
1. 25% year over year revenue growth
2. The launch of Chatter
3. Raising full year EPS guidance to $1.17 from $1.15

Stock Reaction

I will give Benioff this: he is a master showman. It takes a true master to get a 17% one-day lift for raising your guidance by less than 2% on a stock that was already selling at over 80 times earnings and that is non-GAAP. If you look at GAAP earnings for the year, you would be over 200 times earnings for this fiscal year. I would imagine the CEO is even amazed at his ability to charm the masses. He definitely left tens of millions of dollars on the table by selling large chunks of his shares in the sixties and seventies, but not to worry: he still has millions of shares to unload which he is doing systematically. I think last night’s hypefest on Mad Money will mark the top of stock’s rocket ride for the year and it will start to crater like other stocks in Cramer’s CANDIES (Ex, Intuitive Surgical)

Red Flags

Where do we even start? It feels like this stock belongs to another era; specifically late in 1999 during the Internet Boom. Consider:
1. Revenue is growing at approximately 25% a year, yet the stock is selling at over 150 times trailing earnings, 90 times this year’s earnings, and over 55 times 2013 earnings
2. GAAP earnings(without adjustments) are going to be less than 50 cents this year
3. Attrition continues to be in the teens
4. Insiders continue to sell like crazy, unloaded another 6.5m last week and again made the top 20 insider selling firms in Barron’s
5. Operating margins declined for the quarter

Conclusion

We were obviously early recommending shorting this stock. We shorted some more at the close yesterday to bring our average cost to $103.78. Luckily our other shorts (BID, ISRG, LULU) have acted as predicted to make up for our early calls on Baidu (BIDU) and CRM which have not panned out as of yet.

Disclosure: Short CRM

Bret Jensen

Chief Investment Strategist (CIS) for S.A.M (Simplified Asset Management), a long/short hedge fund based in Miami, Florida. Responsible for portfolio management and investment selection decisions.