Salesforce.com shares endured a bit of a rollercoaster ride Monday after a pair of equity analysts issued divergent opinions on the software-as-a-service (SaaS)
Goldman Sachs analyst Sasa Zorovic downgraded Salesforce.com shares from “neutral” to a “sell” recommendation Monday while UBS analyst Heather Bellini upgraded the stock to a “buy” rating and raised its 12-month price target to $70 a share.
Investors initially seemed more inclined to side with Zorovic, selling off shares in early Monday trading and pushing the stock down almost 7 percent before it rebounded a bit to close off just $1.10 a share, or 2 percent, to $57.76.
The analysts’ conflicting views and the subsequent investor reaction illustrates just how compelling and competitive the SaaS landscape has become in the past year as more and more specialized on-demand vendors as well as long-time, on-premise competitors race to get in on this burgeoning market.
In March, Gartner predicted the SaaS market would grow from $6.3 billion in 2006 to more than $19.3 billion by 2011. With on-premise goliaths such as SAP, Oracle and Microsoft investing billions in their new on-demand platforms, it’s safe to assume Gartner and other research firms will soon be revising their estimates higher in the near future.
For Salesforce.com, which announced in December that it eclipsed the 1 million-subscriber threshold, 2007 was a banner year. In November, the company easily topped analyst estimates in its third quarter and predicted it would achieve annual sales in excess of $1 billion in 2008.
The company’s remarkable revenue growth and modest profits (it pocketed $6.5 million on sales of $192.8 million in its latest quarter) hasn’t gone unnoticed by investors—the stock is up 44 percent from the $40-a-share price it was fetching this time last year.
In his research note announcing the downgrade, Zorovic said uncertainty about enterprise software spending in the first half of 2008 combined with the fact the stock was trading 14 percent above his 12-month price target of $51 a share led him to cut the stock to a “sell” recommendation.
Meanwhile, Bellini defended her upgrade, writing that “in addition to being the leader in the fast-growing software-as-a-service space, Salesforce.com has done an excellent job preparing itself for the next chapter in its life,” referring to Force.com, the company’s new on-demand application development platform geared toward expanding its subscriber base beyond traditional CRM and business automation applications.
Despite the seemingly wide chasm between the two analysts’ new ratings, both have lauded Salesforce.com’s model, core financials and long-term growth potential. Simply put, Zorovic thinks it’s time to cash out while Bellini is willing to let it ride.
Of the 34 analysts tracking the stock, 17 rate it either a “buy” or “strong buy” while 13 analysts have issued either a “hold” or “neutral” rating. Zorovic joins three other analysts who are recommending investors sell Salesforce.com shares.
Cantor Fitzgerald analyst Mark Verbeck maintains a “hold” rating on the stock and reiterated a 12-month price target of $61 a share in November.
“The trouble is that game-changing, high-growth companies are often expensive,” Verbeck wrote in an e-mail to InternetNews.com. “Once they become cheap, you no longer want to own them. Look at companies like Dell, Intel, Starbucks, etc.”
For now it appears customers—particularly small- and mid-sized companies (SMB) and some Fortune 500 firms— are enamored with the on-demand model, eschewing recurring licensing and service contracts in favor of hosted applications and application development platforms they can access for a monthly fee.
Last quarter, Salesforce.com reeled in Citigroup, its largest customer win ever, to provide financial adviser desktop software to more than 30,000 financial planners. The company now boasts five 25,000-plus subscriber accounts and expects Force.com to help it fend off competition from the likes of SAP, Oracle, Microsoft and NetSuite, which held its initial public offering in December.
Other niche players such as Concur Technologies, which offers on-demand travel procurement and expense reporting applications, and SuccessFactors, a vendor of performance and talent management applications, are garnering their share of attention on Wall Street as investors seek out SaaS providers with less bloated valuations.
“While I don’t think (Salesforce.com) is severely overvalued, I do have a hold rating as I can’t recommend investors put new money to work in this [stock] at this time,” Michael Nemeroff, an analyst at Wedbush Morgan Securities, said in an e-mail Monday afternoon.
Nemeroff downgraded the stock from a “buy” to a “hold” rating November 1 and maintains a price target of $57 a share.
“However, as we saw during the last downturn, most relative valuations are only based on what multiples investors are willing to pay at any given time,” he wrote.
While Saleforce.com executives continue to extol the company’s performance and potential, executives—particularly Benioff, CFO Steven Cakebread and co-founder Parker Harris—continue to sell shares at a brisk pace. According to Thomson Financial, Salesforce.com insiders in the past six months have sold more than 2.9 million shares of their company’s stock while purchasing only 11,000 shares.
Benioff and Cakebread told analysts in November to expect earnings of between 12 cents and 13 cents a share for the current fiscal year on sales of between $737 million and $39 million, up from earlier forecasts of 10 cents a share on sales of roughly $730 million.
“Bottom line, if Saleforce is changing the software business and can continue its rapid growth, it is probably not extremely overvalued,” Verbeck wrote. “If not…”
