Salesforce.com (CRM): Overreacting to Headlines

Even salesforce's cloud player revenue is decelerating, predominately because the company started offering these solutions more than a decade ago. Every tech company has it's inevitable bell curve of adoption and the consequent drop on new license’s once saturation has been reached. Aivars Lode avantce

Salesforce.com  (CRM):  Overreacting to Headlines
Rating  UNDERPERFORM Price Target $49.00 Price $74.65
Key Takeaway We believe CRM shares +12% yesterday is an overreaction to Bloomberg headlines indicating the company is fielding takeover offers. While we appreciate the possibility of a sale, we believe the probability is very low, especially with the stock already trading at an inflated valuation. Strategically, we see MSFT being the most likely suitor, with ORCL, IBM, and GOOG in the mix. We remain Underperform while respecting the possibility of a black swan acquisition. Motivations to Sell. CRM's new business growth, by our estimation, has been decelerating at a meaningful rate over the last several years, while the cost of new business continually increases. All the while, the appearance of growth has been maintained fairly well, with new ACV growing 17% in F4Q, after the first 9 months had only grown 6%. Our research suggests the quarter benefited from renewal business being pulled forward -- the latest in a string of factors which inflate the simple calculated billings metric that investors are using to rate the stock. If we are right, now would be a good a time to sell the company, with the stock at all time highs and many growth levers having been exhausted. In fact it might make sense and perhaps coincide with prior CFO Graham Smith returning to the company after having announced his intent to depart. Microsoft. With all eyes on Cloud and an M&A track record suggesting a willingness to pay much higher multiples (Aquantive, Fast Search, Skype), we can appreciate the strategic rationale in marrying the largest SaaS asset with Microsoft's Azure, which is a viable #2 cloud platform. Under CEO Satya Nadella, MSFT has demonstrated itself to be more technologically open to competing standards and platforms than in the past, and potentially friendly to CRM's underlying ORCL technology stack. In context, a $50bn purchase would represent roughly 2 years of MSFT's free cash flow. Oracle. Though Oracle seems to be an investor favorite to seal a deal given its push into Cloud, Mr. Benioff's roots at Oracle, and the fact that salesforce.com runs on Oracle's technology stack, we think it very unlikely at current levels. The Street has long speculated Marc Benioff as a possible successor to CEO Larry Ellison, though we see Oracle President Thomas Kurian as a more likely CEO candidate. Further, we believe an acquisition of CRM would represent a significant departure from the company's capital discipline, specifically in not overpaying for assets. At yesterday's closing price, CRM now trades at just shy of 10x TTM recurring revenue vs. ORCL having historically paid 7-8x on average, and as high as 10-11x, but for much smaller assets. Lastly, we believe a deal may present a regulatory challenge with salesforce.comhaving at least 30-40% of the total sales automation market (includes both SaaS and on-premise), with Oracle having about 20% of the sales automation market. IBM. Covered by Jefferies IT Hardware Analyst James Kisner, we believe this would be a strong departure from IBM's focus on infrastructure rather than application software over its course of history, in addition to its disciplined approach to M&A valuation. In addition, we believe the risk of re-platforming CRM from Oracle to IBM technology to be a significant risk, as would be the business risk of having to rely on Oracle technology into perpetuity. Finally, as the smallest market cap name we consider, it would probably be more difficult for IBM to pursue such a large acquisition from a financial perspective. Google. Covered by Jefferies Internet Analysts Brian Pitz & Brian Fitzgerald, we believe the company may be interested to catalyze its position in enterprise cloud computing, though we don't believe CRM would be the best asset to do so. We believe GOOG's recent partnership with VMW, the leading enterprise cloud platform, is more sensible than chasing a specific enterprise cloud application.