Is Salesforce a Risky Investment?

With shares of Salesforce.com (NYSE:CRM) trading at around $40.95, is CRM an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock's Movement

Understanding the Salesforce story is relatively simple. Salesforce has managed to consistently increase revenue on an annual basis, but it has difficulty delivering profits. Below are Q1 revenue numbers.

Subscription & Support up 28.5 percent year-over-year Professional Services & Other up 25.3 percent year-over-year

Geographically:

Americas up 30.0 percent Europe up 38.0 percent Asia up 7.0 percent

Up to this point, one might wonder why shorts are all over this stock. After all, as long as there is revenue growth, there is potential. However, in Q1, gross margin dropped 160 bps to 76.6 percent, and operating expenses increased 28.6 percent. The biggest expenses have been R&D, G&A, and sales and marketing.

Another issue investors have with Salesforce is creative accounting. Investors have a reason to oppose executives being paid via stock-based compensation, but it's also ironic that there are creative accounting concerns when the company can't deliver consistent profits. This is a rarity.

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The chart below shows some basic fundamentals for Salesforce, Oracle Corporation (NASDAQ:ORCL), and International Business Machines Corporation (NYSE:IBM).

	CRM	ORCL	IBM
Trailing P/E	N/A	15.89	14.32
Forward P/E	64.97	11.69	11.32
Profit Margin	-9.81%	28.46%	16.05%
ROE	-14.92%	24.29%	82.86%
Operating Cash Flow	806.87M	13.72B	19.32B
Dividend Yield	N/A	0.70%	1.80%
Short Position	68.20%	1.10%	1.60%

It’s obvious that Saleforce can’t hold a candle to Oracle and IBM on a fundamental level. Let's take a look at some more important numbers prior to forming an opinion on this stock.

T = Technicals Are Mixed

Salesforce has outperformed Oracle and IBM over a three-year time frame, which is impressive. However, Salesforce has been the weakest performer year-to-date.

	1 Month	Year-To-Date	1 Year	3 Year
CRM	-2.44%	-2.80%	24.74%	84.76%
ORCL	1.57%	2.70%	32.89%	54.98%
IBM	3.42%	9.74%	12.13%	72.20%

At $40.95, Salesforce is trading below its averages.

50-Day SMA	42.85
200-Day SMA	42.35

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E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Salesforce is higher than the industry average of 0.30, but it still qualifies as normal.

	Debt-To-Equity	Cash	Long-Term Debt
CRM	0.69	2.10B	1.69B
ORCL	0.45	33.41B	19.75B
IBM	1.74	12.06B	33.40B

E = Earnings Have Been Poor

Earnings are the biggest problem for Salesforce. The annual trend is not good. Revenue can assist a stock’s performance for a considerable amount of time, especially in a bull market, but once the party ends, investors and traders will opt for consistently profitable companies.

Fiscal Year	2009	2010	2011	2012	2013
Revenue ($) in millions	1,077	1,306	1,657	2,267	3,050
Diluted EPS ($)	0.09	0.16	0.12	-0.02	-0.48

Looking at the last quarter on a year-over-year basis, revenue increased but the loss widened. A similar pattern played itself out on a sequential basis.

Quarter	Apr. 30, 2012	Jul. 31, 2012	Oct. 31, 2012	Jan. 31, 2013	Apr. 30, 2013
Revenue ($) in millions	695.47	731.65	788.40	834.68	892.63
Diluted EPS ($)	-0.04	-0.02	-0.39	-0.04	-0.12

Now let's take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

Conclusion

Salesforce is trading at 65 times forward earnings, which doesn't leave much margin for error. The stock is down in what has been a strong market year-to-date, guidance was underwhelming, competition is likely to increase, there are currency headwinds, and margins and net income have seen consistent declines since 2010.