How to Spot the Next Multi-Bagger; 5 Traits of Great Growth Stocks: Amazon.com, Inc. (AMZN) and More

salesforce.com, inc. (NYSE:CRM)

Salesforce.com has come to dominate cloud computing. The company’s suite of applications allows customers to better organize their sales operations and drive revenue. By using a cloud platform, businesses can implement Salesforce.com’s applications cheaper and quicker than competitors. The formula is working. Over the past five years, the company has manged to post an impressive 30% annual top and bottom line growth.

The cloud computing story is still developing, with the industry expected to grow 25% annually over the next seven years. With Salesforce.com leveraged to the holy trinity of tech trends — cloud, mobile, and social — industry tailwinds will allow the company to post double-digit earnings growth through 2020.

Yet in spite of strong fundamentals, no other company draws more comparisons to the tech bubble excesses of 1999 than Salesforce.com, with its stock trading at 85 times forward profits. Critics point to competitors like SAP AG (ADR) (NYSE:SAP) or Oracle Corporation (NASDAQ:ORCL), which trade at 21 and 12 times earnings, respectively.

The issue with this analysis is that these companies don’t make suitable comparisons. It’s more appropriate to compare Salesforce.com to another cloud name like Rackspace Hosting, Inc. (NYSE:RAX), which trades at similar 75-times forward multiple. However, Salesforce.com deserves its premium, thanks to its higher projected earnings growth rate.

Foolish Bottom Line

All three of these companies represent the characteristics of great growth stocks due to their strong earnings momentum, sustainable competitive advantages, and excellent management teams.

But here’s the key takeaway: Don’t dismiss a stock outright because of a high P/E multiple or a recent price gains. Many of the greatest growth stocks in history like Wal-Mart Stores, Inc. (NYSE:WMT), McDonald’s Corporation (NYSE:MCD) and The Coca-Cola Company (NYSE:KO) all sported expensive valuations during their multi-decade runs. Yet each of these companies created fortunes for investors.

The article How to Spot the Next Multi-Bagger; 5 Traits of Great Growth Stocks originally appeared on Fool.com and is written by Robert Baillieul.

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