Sell Salesforce.com and Buy a New Life

NEW YORK (TheStreet) -- My recent bearishness toward cloud giant Salesforce.com (CRM) has rubbed quite a lot of investors the wrong way.

Whenever the term "valuation" comes up, it causes many to shift in their seats and become uncomfortable. But that's not my problem.

What continues to be absent in all of the "Salesforce euphoria" is the reality that competition from the likes of Oracle ( ORCL), IBM ( IBM) and Microsoft ( MSFT) can easily throw a monkey wrench into the high expectations that are baked into Salesforce.com's lofty stock price.

The result would be a Chipotle Mexican Grill ( CMG)-style spiral back down to reality.

Why make such bets on stocks with such dizzying valuations? Is it worth it?

I'd say no. Investors who bet on these stocks are playing a dangerous game and should move on to other stocks.

From an investment perspective, Salesforce.com remains expensive even on the most bullish assumptions. If investors were to look out five years and assume 10% annual margin increases and 40% annual revenue increases, the stock would still be valued at less than $140 five years from now.

So while investors feel comfortable paying close to $150 for the stock today, the growth prospects do not support such a high P/E.

Salesforce is one of the market leaders in the popular "software as a service" market, but that does not necessarily imply real present value.

What's more, even if Salesforce.com averted the competitive threats mentioned above, that wouldn't eliminate the concerns about its valuation.

For those of you who continue to think that I have an ax to grind with the company, that's far from accurate. The company is only doing what it's supposed to do.

Rather, my issue is with how it is valued relative to its performance and relative to its peers -- namely Oracle and Microsoft, and, to a lesser extent, Red Hat ( RHT). All three present much better value as well as fundamentals. But these facts often escape Wall Street.

Trying to satisfy an insatiable appetite for growth, investors don't mind placing big bets on companies such Salesforce.com, expecting out-of-this world future performance.

As a result, Salesforce continues to enjoy a multiple that is sky-high and offends investors like me who stress realistic P/E ratios.

Disappointingly, the argument continues to be that valuation does not matter in the tech sector. That's all well and good so long the roulette wheel keeps spinning. But what happens when it stops -- and on the wrong color?

Though the company continues to generate a considerable amount of interest from investors, the odds are stacked against it because it is already priced to perfection while rivals such as SAP ( SAP) produce higher margins and increased levels of profitability.

It's worth mentioning that Salesforce.com hasn't earned a profit for almost a decade while its gross margins have shown some erosion over the past several quarters. Yet the stock rises.

In situations like these, one slip can be catastrophic. But will investors know what to look for? While the tech sector as a whole continues to lead the stock market, it seems that Wall Street is being reckless and cavalier toward valuations of stocks such as Salesforce.com. Individual investors would be wise to get a life and move on.

At the time of publication, the author held no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a private investor with an information technology and engineering background and has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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