My Case Against salesforce.com, inc. (CRM)

salesforce.com, inc. (NYSE:CRM) is a $22 billion internet-based business. Its primary product is customer relationships management (CRM) software, which sales professionals use to keep track of customers. Salesforce is the number one customer relationship management software company. And it’s an early entrant in “cloud computing.” It delivers its software over the Internet. That’s great for small businesses, because it eliminates the need to own a server, install, upgrade, and maintain software. I firmly believe that this Wall Street darling is in trouble for the following several reasons.

Growth is slowing

Once upon a time, salesforce.com, inc. (NYSE:CRM) was growing rapidly. The year it went public, 2004, sales grew 88%. Had it kept that up until the present, it would now be making $4.5 billion in sales. Instead, it’s only barely passing the $3 billion mark. But, 2005 was the last year Salesforce’s revenue growth topped 80%. Though investor belief in it continues unabated, Salesforce’s hyper-growth phase is a thing of the past. It’s gone and it’s never coming back.

In fact, despite the increase in sales year-over-year, losses have greatly increased, moving from $0.02 per share in 2010 to more than $0.56 per share today. When sales go up and bottom line goes down, there’s usually an over-exuberant M&A activity going on.

An acquisition craze

Over the last three and a half years, salesforce.com, inc. (NYSE:CRM) has made 46 acquisitions and spent a total of $4.6 billion in stock and cash. It bought Radian6 in May 2011 for $336 million, Buddy Media in June 2012 for $736 million, and ExactTarget this month for $2.5 billion. All three companies were unprofitable. The companies were acquired at prices ranging from eight times sales (Radian6 and ExactTarget) to 18 times sales (Buddy Media). Paying so much for these unprofitable companies makes it extremely unlikely that Salesforce.com will ever make a profit on these acquisitions. Instead, at some point in the future, it’s likely to trigger large goodwill write-downs. This will only exacerbate losses even further.

Not alone in the game

Salesforce’s fat gross margins have attracted competitors to the table. The company gets 90%-plus of its revenue from subscriptions and support. That part of the business earns 85% gross margins. That’s incredibly high margins. And that’s why Microsoft Corporation (NASDAQ:MSFT) and Oracle Corporation (NASDAQ:ORCL) have also decided to take part in the game.

Last year, Microsoft said its CRM software, Dynamics CRM, was available in 40 markets and 41 languages. It also said it would offer Salesforce and Oracle CRM customers low promotional pricing for the first 12 months. Microsoft is charging $34 per employee per month, versus salesforce.com, inc. (NYSE:CRM)’s Professional edition at $65 per employee per month and Enterprise’s edition at $125 per employee per month.