A Bad Day for the Salesforce Kool-Aid (Video)
“A good company but an unrealistic valuation” is how Tilson, the founder and managing partner of T2 Partners and the Tilson Mutual Funds, summed it up in an appearance on CNBC today (video below), arguing that Salesforce could be the next company to fall by 75 percent, a la Netflix.
Hype about the cloud, pushed by CEO Marc Benioff, whom Tilson called a “world-class salesman,” is giving way to the fact that Salesforce has what he calls “a nice app to help mid-market companies manage their sales force.” Its other lines of business — including Chatter, its social application, and its plans for pushing into larger-sized enterprise companies — just don’t justify its huge market cap, which was until today north of $17.5 billion. Today, Salesforce’s market cap was about $800 million smaller as the shares fell by $6, or 4.6 percent, to $123.56.
Tilson is betting that Salesforce’s fair value is about 75 percent lower than its current trading range, which, based on Tuesday’s closing price of $129.56, would put it at about $33 a share.
It’s been hard not to wonder when the Salesforce valuation rocket was going to run out of fuel. Two years ago, Salesforce was trading at $59 a share, and in July peaked just above $159 a share, amounting to a surge of about 170 percent. But since the start of 2011 the shares are down 7 percent (which in fairness includes today’s drop), while it has traded at a seemingly ridiculous 600-plus times trailing year’s earnings.
Benioff and Salesforce have usually had a friendly platform at CNBC. Jim Cramer, the exuberant two-fisted host of its “Mad Money” investertainment show has hosted Benioff numerous times and even admitted that while Salesforce seemed like “Kool-Aid,” he was not only drinking it, but “liked the taste of it.”
Indeed, Salesforce is growing its sales — Benioff recently said it’s on track do $2 billion in sales this fiscal year — but it has been doing so at a loss. It reported a $4.3 million loss on $546 million in sales in its July quarter. Benioff has argued that Salesforce needs to spend now to grow its customer base and to try to take business away from the likes of Oracle and SAP, that he says “don’t get the the cloud.” We’ll see about that. Salesforce next reports quarterly results on Nov. 18.