Citi says Buy salesforce.com (CRM), Really?
Posted August 27th, 2008 by Steve Reeves
Yesterday Citigroup went to bat for salesforce.com (NYSE:CRM) setting a $70 target price and a 'Buy' rating. Will corporate America during these tough times keep buying their software and services to send CRM shares to the promise land? Seems a bit much.
Clusterstock.com's said it best yesterday:
Citi analyst Brent Thill's valuation of the the stock hasn't changed, so he has upgraded to BUY while maintaining his $70 target. We agree with most of his logic, but think the market is right to be concerned.
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Thill's thesis is based on:
- Valuation – stock down 13% in 3 days since earnings, even after short-covering; trades at 24x CY09 FCF/share vs. 30% 3-yr CAGR (CY07-10)
- 2H seasonality – Sep. & Oct. are historically strongest months for CRM stock (+18% & +14% avg. in 2004- 2007)
- Big deal pipeline bodes well for 2H bookings – Our checks indicate an impressive list of large enterprises in the pipeline, which could lead to a strong finish to the year despite the macro environment.
That's fine logic, but if the reason for the deferred revenue shortfall was what it usually is--sagging demand--the market is smart to be cautious. As companies try to maintain margins in the face of declining consumer spending, IT budgets will come under pressure. This won't kill CRM, obviously, but it could slow its growth. And that alone is reason enough to expect sustained multiple compression.
SOURCE: http://www.clusterstock.com/2008/8/salesforce-com-crm-checks-strong-but-exposed-to-slowing-economy
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CitiGroup Really? It's all in the deferred revenue
Agree with your comment. I'm a little stumped as to why the CitiGroup analyst would upgrade the stock. In my mind, its all about the size of the customer base, annual revenue and deferred revenue that sits on the balance sheet. The large the revenue nut and the bigger the liability on the balance the tougher it becomes to materially move the revenue line up. Once you put a pencil to the amount of revenue growth that needs to happen, break it down into revenue recognition buckets according to the term of the contracts and put it against the current revenue of $1B plus annually - and it becomes very, very difficult to maintain the 50% year over year growth figures. The growth rate has to come down. To maintain the same growth means the pipeline has to grow exponentially with each passing quarter. I don't see this happening even if the pipeline is healthy. www.iangilyeat.com