11:36AM salesforce.com (CRM) $17.44 -0.38 (-2.1%) The decline in CRM shares finally brings this stock to level that merits consideration. The stock was trading at $21 on Tuesday; today's level of $17.44 is 17% lower and $300 million on market cap lost. The lowered guidance for the 2006 fiscal year (ends Jan 2006) of $0.10 earnings, versus the then consensus $0.15, is responsible for taking the bloom off the rose, but the real story is still the fantastic growth the company is showing in building a customer base.
In the enterprise application market, salesforce.com is only company that is showing the type of breakneck growth that software companies are supposed to show. Granted, it is still small compared to a company like Siebel Systems (SEBL), but salesforce.com added $6 million in revenue on a sequential basis this, 83% higher than last year. quarter. Siebel added only $16 million on a sequential basis and was $4 million lower than the year prior quarter. Who's hot as a growth stock in sales management software space? It isn't Siebel.
What is happening right now is that analysts are rethinking the scalability of the CRM business model. But they aren't coming to the conclusion that the model isn't scalable. The only thing driving down the value of CRM stock right now is a lowering of the ramp of margin expansion over time. Even the worst sell-side analyst projections show a steady increase in operating margin for the next two years. It is just a lowering of expectations.
The reason that the decline in CRM stock today is so interesting is that we firmly believe the enterprise software market is headed into a consolidation phase. Someone is going to buy salesforce.com for a nice premium before the company reaches its full market penetration. The only question is when. The difficulties Oracle has faced in its pursuit of Peoplesoft have made others hesitant to act. But, ironically, salesforce.com becomes more valuable whether Oracle wins or loses the PSFT fight. If Oracle is successful, it forces others, like SAP and Microsoft to ponder how to combat a stronger Oracle with established application customers.
If Oracle loses the fight for Peoplesoft, you can beat that Larry Ellison will turn to the next acquisition candidate. Many think that candidate will be Siebel Systems, as SEBL is the "great whale" with its entrenched customer base. But, as we have shown in prior articles (see the Ahead of the Curve archives), Siebel's churn is showing that the customer base is vulnerable. Larry could either buy salesforce.com and start poaching the Siebel customer base aggressively, or he could buy salesforce.com and Siebel together, and guarantee himself "first crack" at converting Siebel customers to the subscription based salesforce.com model. The total cost of buying CRM (1.8 B) and SEBL (5.1 B) is, in fact, less than the cost of buying PSFT ($8.8 B).
Siebel customers will convert from the current CRM Siebel product and business model: Siebel itself is aggressively working to roll-out just such a product. The only question is who will do it over the next few years: Siebel, salesforce.com, SAP, or Oracle. Those are the only real prospects right now. Oracle's CRM product has already proven to be a weak contender. SAP's is making good progress. But salesforce.com's is the only hot product in the space. It makes a lot of sense for somebody to go after CRM at some point, since in the long run, value will accrue at the application level, not platforms or tools. Larry is the only one who is currently acting on this idea, but eventually, someone bigger will buy salesforce.com. It seems inevitable. The only question is who and when. We admit to being only able to guess at those parameters, but at these depressed prices on salesforce.com, it might be worth it now, even if it takes two years. But, who knows, the Oracle cross-hairs might land on CRM as soon as Monday, if the PSFT bid does indeed fail and Larry truly does give up on PSFT. "Giving up" is not Larry's style, but what he is really after is "entrenched applications." Peoplesoft is just one of those. salesforce.com is rapidly becoming one. - Robert V. Green |
