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Tech stocks - Thursday, September 4, 2008

We're Not Sold On Salesforce.com Right Now

The Dow Jones Industrial Average dropped 340 points. Why? Take your pick: weak job data, dismal retail data, or the looming threat of a housing collapse. Any and all could explain why investors fled the market today but ultimately it should make investors a little more cautious about putting money into the market. While the housing crisis is going to get worse before it gets better, the staff at tech:stocker would like to see the unemployment statistics embark on a downward trend and possibly another round of stimulus checks before we forgo our current conservative investment strategy.

Since we are still thinking about yesterday's buy recommendation for Chordiant Software (CHRD:NASDAQ), we decided to take a looking at the true leader of CRM software, Salesforce.com (CRM:NYSE).

Seldom do we hear anything bad about Salesforce.com and its product offerings. Everyone we know that employs one or more of Salesforce.com's product offerings thinks it has the features and flexibility to work with most businesses, regardless of their size. That says a lot. And with several pricing models making it affordable for almost anyone who has a business, it's initially hard to say Salesforce.com can't help your business.

We're also big fans of the CRM space. Most business want to maximize the efficiency of their sales and marketing efforts and deploying Salesforce.com makes it relatively simple and painless. Before we start sounding like an infomercial for the Saleforce.com, we do know there is a fairly steep learning curve before a business is actually taking advantage of the software's capabilities. Unlike Excel, PowerPoint, and most other Microsoft offerings, using only 20% of the software's capabilities is not a worthwhile investment. The companies we know that employ Salesforce.com's software do their best to maximize their ROI on the investment. Unless Salesforce.com raises their subscription rates like the price of oil back in May, customer attrition will not be an issue in the near future.

Saleforce.com also sports a solid public relations program. Looking at the results we can tell that they not only have smart people working for them internally, but they also have a solid public relations firm supporting their initiatives. By looking at their coverage, seldom do we see them miss an opportunity to get their name in the press. From a strategic standpoint, the only companies we see doing a better job are Cisco (CSCO:NASDAQ), Charles Schwab (SCHW:NYSE), and Apple (AAPL:NASDAQ).

Because Salesforce.com is so well known, we believe this has led the company to a mammoth P/E ratio of 199.9. This has been shrinking over the last few months but not because the company has been improving their earnings, but because the share price is 22 points off its 52 week high.

Salesforce.com should be facing some competition from SAP (SAP:NYSE) and its Business ByDesign package. As we stated yesterday, SAP has tempered its investment in this business unit but with their strong customer base, we do see Business ByDesign being able to pluck some low hanging fruit on the bountiful SAP customer tree even if there product is initially inferior to Salesforce.com. A few years down the road, SAP could become a serious competitor thus forcing Saleforce.com into a price war that they are currently not equipped to handle.

If this were 2000, we would probably ignore the Everest-like P/E ratio and give Salesforce.com a buy rating. But this is 2008 and a recession is looming. Keep an eye on this stock and see if it gets close to its 52 week low. If it does, the Oracle (ORCL:NASDAQ) acquisition rumors that floated around in May might have some substance.