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It seems with every passing quarter, cloud giant Salesforce.com makes fools out of value investors who constantly protest the company’s business while screaming the word “expensive” at every turn to describe the company’s stock. Except, Salesforce.com doesn’t appear to care. As evident by its enormous P/E ratio of 73, the company understands enormous growth expectations exist. Still, despite constant competitive pressure from rivals such as Oracle, Microsoft and IBM, Salesforce.com seems committed to turn doubters into believers. On the heels of another earnings beat, I’m beginning to wonder if it’s time for investors to change their view on the company. Said differently, why fight a moving train?
Record Results In Q3
For the period ending in October, Salesforce.com earned 33 cents per shares on revenues of $788 million, which represented year-over-year growth of 35% and beating on both its top and bottom lines. The company’s performance was helped by a strong showing in its subscription and support business, which grew to $741 million, or 35% year-over-year. Likewise, revenues from segments such as professional services surged 36%.
The company reported non-GAAP operating income of $77 million – an impressive showing and increasing by almost 20% year-over-year. On the other hand, Salesforce saw its operating margins shed 135 basis points, which the company attributed to the Buddy Media acquisition. Nonetheless, margins were still quite impressive – coming in at 35 basis points higher than the year ago quarter, which prompted management to project a “slight improvement” in its full year fiscal 2013.
For its performance, Marc Benioff, the company’s Chairman and CEO offered this: "Salesforce.com is the first enterprise cloud computing company to exceed $3 billion annual revenue run rate, with outstanding third quarter revenue growth at 35% in dollars and 37% in constant currency. Given the strong customer response to our next generation social and mobile cloud technologies, I'm delighted to announce that we expect to surpass a $4 billion annual revenue run rate during our fiscal year 2014."
Can The Company Continue To Outperform?
This was an impressive quarter indeed. Remarkably, with 30% growth across the board, Salesforce continues to show no meaningful signs of slowing down. Investors want to know how long it will continue to do this. So far, the company’s response has been – “as long as we want.” As well as Salesforce is performing and seemingly leaving the completion in the dust, it’s hard to consider that at some point a few of them won’t catch up.
Given the rate at which companies are accumulating "big data" and positioning their models for cloud efficiency, it seems reasonable to project strong ongoing demand these services. I don’t envision a scenario where names such as Red Hat, EMC and F5 are just going to concede this market to Salesforce.com.
Also, I think Microsoft is beginning to make meaningful strides in this area. Not only does the company already enjoy a dominant enterprise footprint, but with its Azure cloud strategy coupled with Office Live, Microsoft has enough leverage to become a power. Not to be outdone, there’s IBM and Oracle, which have been making strategic acquisitions that puts them in the position to help drive operating efficiencies to help propel growth.
Bottom Line
It’s hard to be bearish any company that produces consistent year-over-year revenue growth in the high double-digits – much less growth registering at 30%. Nevertheless, this is the reality with which Salesforce must deal. The company is being perceived as “defying gravity” or my favorite, “pulling rabbits out of its hat.” Still, each quarter there is ample evidence that customers are speaking with their wallets – presumably with “real money.” And they are saying they value the services that Salesforce provides.
As a value investor, the stock is just too rich for me – especially since the company is still in the negative in terms of earnings per share. However, as long as Salesforce continue to prove that it can grow into its valuation, I think there will be some opportunities for gains. That the stock is down 11% from its 52-week high of $164, that time just might be now.
