When it comes to the technology sector, it is always good to be skeptical when looking at valuations of companies and, more importantly, how analysts are justifying their calculations. Looking back, we can think of Fitbit, ShakeShack, and Etsy, and even currently Snap, as under scrutiny for its market capitalization. Snap loses over half a billion a year in net income, but with estimates coming from analysts such as Goldman’s, it has the possibility of reaching $2 billion in revenue in two years, which is enticing for risk-hungry, bullish investors. When evaluating a company on fundamentals and general outlook, we should look to its product, history, management, and most important financials. (To those that are interested in fundamental analysis of companies, Dr. Trifts class on Financial Statements Analysis is a must, albeit challenging) The company was one of the first to offer its service purely through the cloud and helped fuel the growth and interest of SaaS. Marc Benioff was a wunderkind at Oracle before starting and leading CRM. (Fun Fact – the reason Salesforce.com’s ticker symbol is CRM is due to the fact that its core product is a Customer Relationship Management tool).
From an analyst’s point of view, Salesforce is great in forecasting revenues due to its subscription model, and this creates an accountable measure of growth and expecting revenues. When looking to its past four quarters of reports, deferred revenues have been shaky, but for a company of growth and such a high valuation, it should be expected that deferred revenues are going up. Additionally, the company is making money purely through subscriptions of its product which is great, but the lack of diversification in its product line and the fact that services makes up such a little slither of their total revenue without any corporate governance, suggests that in its guidance there will be emphasis on growing services related revenues. Not only that, but services is actually a loser for the company with a net loss factoring in COGS. The reputation of a new company is important which may be why they are funneling unneeded money into services spending, as it makes up an incredibly small portion of the pie. Expenses and G&A seem low and predictable although R&D makes up a high portion for such a high company. We expect the ratio of its spending on R&D to be that for a small cap company. When modeling for expected future growth based on guidance and taking in variables that include revenue, COGS, expenses, taxes, EPS, shares, and some more metrics we get a NPV of $53,991,000,000 or $75.94 per share – not bad for a simple model that took a couple hours coming within 5% of the current value.