CRM: 200+ before 100? Why it’s on the Radar and Why LST is Not Short It (Yet?) (“CRM”) to equity guys isn’t quite what the Yen has been to macro guys, i.e. the “widowmaker”, but it might be getting there.  It’s a stock and business that many people love to dislike, and always think a crash is imminent. Yet it’s continued to ‘climb the wall of worry’, with no end in sight. While CRM is back on LST’s radar and higher up in priority now, LST is hesitant to short here and now, for the following reasons:

The reasons LST does not like CRM from the short side here (from a purely alpha, not beta perspective):

  • It’s not clear why CRM can’t generate ~$3.0 billion in revenue, & trade at 10x that, in the near future. That would take the stock north of $200/share.
  • There is a high interest in shorting CRM (short interest and sentiment wise) – this means there is always a non-negligible risk that that itself will invite unscrupulous marginal buyers who will try to pressure the shorts out. The offsetting factor to that is CRM is large enough now, whereby even with high institutional interest in shorting, the pie is large …
  • ‘Big data’ and ‘cloud’, as gimmicky as they may sound, seem to represent real secular business trends. Why short into growing industries? Investment implication = Overvalued can become more overvalued, or at least remained similarly overvalued on the back of growing revenue. If your belief is that revenue will slow, if not reverse, that’s an entirely different story. But LST is not in the business of glorified coin-flipping.
  • The short/skeptics’ arguments sound lazy/recycled, at least upon first glance. (Valuation this, earnings that, blah blah blah).
  • If the acquisitions in 2012 are being used for nefarious purposes, that can work against you for now, unless you believe in some hard catalyst-induced implosion.
  • Its stock price is high, so it’s relatively cheap for CRM to buy moar revenue…
  • Some technical/chart types are attracted to it because the technical/charts look good to them…which can be violently self-fulfilling.
  • Unclear what the acquisition risk is, albeit it would be a strong contender for the AOL Time Warner of our time, if it were to happen.

Having said all the above, CRM looks a lot more interesting on the short side to LST currently than it did in 2011 for various reasons, which LST may or may not publicly share at some future point. Note that LST always reserves the right to “trade first, analyze later”, but the above list of concerns is no small one. Unlike ‘work’ in introductory Physics, shorting is a highly “path-dependent” endeavor…


7 Responses to CRM: 200+ before 100? Why it’s on the Radar and Why LST is Not Short It (Yet?)

  1. Mr Black says:

    Great post. I take it you aren’t a fan of Benioff?

  2. Jacob says:

    The short interest and days to cover do seem high…

  3. David D says:

    What do you make of CRM’s revenue recognition ?

  4. Oscar M says:

    Sorry LST, but your research here is what is lazy. “why not 10x revenue” ? That’s a thesis ?

    Have you looked into Salesforce’s technology ? Its pricing ? Customer satisfaction ?

    We have … and the short answer is that Salesforce’s products are not considered cutting edge in the industry, and are considered over priced for what is being provided.

    Given that Salesforce is not profitable, with inferior, overpriced product — who cares what their profitless revenues are ?

    This is a competitive industry … competition is only increasing and products will ultimately be commoditized.

    Of course, at all time highs, Salesforce’s stock price strength is indeed perplexing, and as we both know, anything can happen in the market. So sure, it “could” hit $200. It shouldn’t, but then again, it shouldn’t be at $174 either.

    • Oscar: No, it’s not a thesis, it’s my view of the risk. For the record, I do make it clear (albeit buried in the bottom) that my ultimate interest in this one is to short it. I’ve never owned it and never will. I’ve only been short this, and been lucky (not smart) with the timing.

      Yes, I’ve looked into CRM’s “technology”, pricing, customer satisfaction/perception, etc… through the last few years (since 2009). I agree with what you’ve seen.

      Fine, CRM may not be profitable on a GAAP/earnings basis, but its cash flow is much better. That seems a more desirable position than, say, very positive earnings and negative cash flow (e.g. GMCR).

      I’ll grant you that net of acquisitions, its cash flow has deteriorated substantially, but that’s a different argument…and a reason I’m interested in it again (haven’t examined carefully since 2011).

  5. Oscar M says:

    Thanks for the thoughtful response.

    FWIW, I don’t see their cash flow as so hot either – it appears that all of the modestly positive cash flow is generated by CEO and other executive stock option exercises. Not exactly FCF from Operations in my book.

    A lot of red flags here.

    But you are wise to remain cautious while waiting for the undeserved momentum to dissipate.

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