Sunday, December 11, 2005 (CRM)

One of the best performers of last week was (CRM) which rose over 12% for the week. Clearly, CRM does have a commanding share (some 60%) of the on-demand CRM market. Siebel in the midst of its takeover by Oracle has other priorities at the moment; Microsoft and SAP both appear to be slow off the mark. In the most recent quarter, it appears that subscription revenue has grown by 79% YOY.

Yet, valuations appear to endorse a brilliant future with little regard for potential risks. P/E of 160 times trailing earnings, price to sales of 14 times require little comment. The company has grown its FCF in the last few years as a result of its subscriber revenue model. However, at a price/FCF multiple of 73 the FCF yield is only 1.4%.

The subscription model defers revenues to the balance sheet to be amortized over subsequent quarters. Hence, earnings tend to have less relevance than cash flows in their business model. Similarly, fluctuations in ongoing business tend to be less transparent and smoothed by the amortization of the deferred revenues.

The current EV/EBITDA is a staggering 386 times. Trailing twelve months ROIC is about 17% though in the most recent quarter, ROIC was 30.7%!

Obviously, the fundamentals appear stellar but the valuation is cosmic. Insiders tend to agree with my assessment, it appears. In the last six months, directors and officers have sold off in excess of $63 million of stock.

To be fair, Marc Benioff, the seller of the bulk of the stock, receives no salary as Chairman and CEO. Nevertheless, this amount of selling is striking in light of the company's operating profit which totals only $18 million for the last twelve months!


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