Why Salesforce.com Stock Remains a Steal at Under $65

NEW YORK (TheStreet) –- Why are shares of a technology company that reported 40% revenue growth only up about 9% the day after?

That's the problem with Salesforce.com (CRM) Friday despite being an incredible growth story that could provide a buying opportunity for savvy investors.

After all, Twitter (TWTR) shares jumped more than 20% after it posted better-than-expected results. Yet, Twitter is not growing nearly as fast as Salesforce, which is a leader in its market.

To me, Salesforce's second-quarter earnings, reported late Thursday, removed any doubt CEO Marc Benioff plans to concede any market share to new cloud entrants.

Yet, there's that Wall Street reaction. Shares, at close to $61, are up 10% for the year to date. The stock is still below my target of $65 per share

The stock still trails the tech sector's 10% gain, according to Morningstar, and is down more than 1% since the beginning of July. Why?

Consider, the company is growing almost every important metric by more than 30%. During the quarter, Salesforce generated $246 million in cash, up 34% year over year. The company posted deferred revenue of $2.35 billion, up 31%. And when you factor the $5 billion of unbilled and deferred revenue (revenue under contract but not yet on the books), Salesforce is undervalued by at least 10%.

Has Wall Street become less enthused with Benioff's growth-at-all-cost mentality? To some extent this may be why shares of Salesforce have suffered since July. What I think is important to consider is the degree to which Benioff can extract higher long-term profits from Salesforce's increased market share. With the company projecting full-year revenue growth to be between 31% and 32%, a few basis point increases in gross margin can turn Salesforce into a strong profit producer.

Salesforce's ability to differentiate from more mature enterprise giants like IBM (IBM) and Oracle (ORCL) gives it an advantage that customers can't be without. Its ability to manage cloud functions like sales, marketing and big data analytics is helping CIOs save a ton of money.

Salesforce has shown it doesn't mind undercutting IBM and Oracle because the Customer Relationship Management market is expected to grow to $24 billion this year and by another 50% in three years, according to research firm Gartner.

Salesforce has guided accordingly. The company understands that despite how much IBM or Hewlett-Packard (HPQ) may boast about their respective cloud offerings, Salesforce will remain a disruptor. The company's subscription platform is the new standard -- replacing traditional contracts and bundled licenses.

The way I see it, Salesforce's cloud dominance has only begun. That management has raised guidance four times in the past four quarters affirms there is no sign of Salesforce slowing down.

Follow @Richard_WSPB

TheStreet Ratings team rates SALESFORCE.COM INC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:

"We rate SALESFORCE.COM INC (CRM) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, good cash flow from operations and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including unimpressive growth in net income and generally higher debt management risk."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 11.6%. Since the same quarter one year prior, revenues rose by 37.4%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Net operating cash flow has significantly increased by 67.05% to $473.09 million when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 40.82%.
  • Compared to where it was a year ago today, the stock is now trading at a higher level, regardless of the company's weak earnings results. Despite the fact that it has already risen in the past year, there is currently no conclusive evidence that warrants the purchase or sale of this stock.
  • Despite currently having a low debt-to-equity ratio of 0.53, it is higher than that of the industry average, inferring that management of debt levels may need to be evaluated further. Even though the debt-to-equity ratio shows mixed results, the company's quick ratio of 0.48 is very low and demonstrates very weak liquidity.
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Software industry. The net income has significantly decreased by 43.1% when compared to the same quarter one year ago, falling from -$67.72 million to -$96.91 million.

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

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

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