salesforce.com, inc. (CRM): Is This SaaS Company Just Too Expensive?

Oracle’s primary cloud service is Oracle Corporation (NASDAQ:ORCL) Cloud, which allows enterprises to shift data and applications between the public cloud and their private cloud. Much like many of the major tech companies, Oracle is looking to expand its cloud-based offerings to boost top-line growth over the long term.At the end of the first quarter there were a total of 69 hedge funds long the stock, this includes the top hedge fund owner by market value, which took a $967 million position that made up 5.8% of its portfolio (see Eagle Capital’s portfolio).

Another notable and underrated play in the space is SAP AG (NYSE:SAP). SAP is the leading provider of enterprise resource planning software. The company’s major segment is software and software-related services, accounting for over 80% of revenues.
SAP’s cloud offering includes subscriptions and support that permits the customer to use specific SAP hosted software functions. SAP has two cloud segments, Cloud Applications and Ariba.

The big advantage for SAP AG (NYSE:SAP) is its leading position in enterprise resource planning (ERP). SAP leads the enterprise resource planning application market, with 35% market share of 35%, followed by Oracle Corporation (NASDAQ:ORCL) at 20%. Meanwhile, SAP also leads the market In customer relationship management software, with around 20% market share, ahead of Oracle and salesforce.com, inc. (NYSE:CRM).

SAP AG (NYSE:SAP) also generates strong free cash flow annually; its cash flow from operations most recently increased to $853 million, or 29% year-over-year. Going into 2013, there was a total of only 11 hedge funds long the stock, but this was a 120% increase from the prior quarter. Billionaire Ken Fisher of Fisher Asset Management had the largest position in Oracle Corporation (NASDAQ:ORCL), worth some $514 million (see Fisher’s latest picks).
Valuation

salesforce.com, inc. (NYSE:CRM) trades at quite the outsized P/E, a forward P/E of 67. Its P/B multiple is also rich, at over 10 times, well above the 5.9 times industry average. However, with Salesforce.com’s dominant position in the CRM market and the impending increase in spending on enterprise software, the premium may well be justified. Salesforce.com has a five-year expected earnings growth rate of 40%, which is much higher than the peer group average of 18.7%.

The bottom line
salesforce.com, inc. (NYSE:CRM)’s leading position in the SaaS market, despite competition from tech giants Oracle and SAP AG (NYSE:SAP), gives it some of the best exposure to the rapid growing SaaS market. Thus, despite its valuation, the company could still move higher.

Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends salesforce.com, inc. (NYSE:CRM). The Motley Fool owns shares of Oracle Corporation (NASDAQ:ORCL).

The article Is This SaaS Company Just Too Expensive? originally appeared on Fool.com.

Marshall is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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