Few Growth Prospects for Salesforce.com

 | Jan 05, 2012 | 3:30 PM EST
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Investors have a love-hate relationship with Salesforce.com (CRM). On one hand they love the revenue growth and the excitement of the cloud computing space and on the other hand they hate the fact the company hasn't been able to penetrate the much larger and more lucrative enterprise resource planning (ERP) space.

If Salesforce.com can't begin to take market share from SAP (SAP) and Oracle (ORCL) in ERP, it really doesn't matter what happens in the cloud CRM space.

Salesforce.com basically operates in three divisions. Salesforce.com offers on-demand cloud-based customer relationship software. The company's products allow customers to manage their relationships with customers. Force.com offers a method for a company to create a social enterprise. And Database.com is a cloud-based database solution. While I'm sure there is growth left in these businesses, investors want to know where the next wave of growth is going to come from.

Basically, it boils down to "what have you done for me lately?"

Salesforce.com recently embarked on an acquisition spree to enhance its offerings and grow revenues, but I think investors have seen through that ploy.  Relying on acquisitions really doesn't address its larger problem of finding another huge market to grow into. That huge market would be. Depending on whose estimates you use, the global opportunity for ERP in 2011 was between $45 billion and $47 billion a year. ERP software handles the nitty gritty of running the back end of a large enterprise with things like, human resources, supply chain management, sourcing and procurement and accounting. Real boring stuff, but vital if you are running a global enterprise with thousands of customers and employees.

I think it's going to be tough for Salesforce to really make a dent in this market.  ERP vendors are really entrenched. Imagine you're doing business in 100 countries, have 300,000 employees and millions of customers and at a meeting somebody says, "Hey, let's switch accounting systems." What happens? You fire that guy and continue on with the meeting. Salesforce.com's best opportunity is small-and medium-sized business, but in that market they are up against Microsoft (MSFT) and Oracle's cloud service. While the company has some ERP solutions on their AppExchange and Force.com platform, it's not enough to slay Microsoft or Oracle. It's a start, but that's all it is.

Salesforce.com created an entirely new market, but growth is slowing. I think they are boxed in and will have a tough time finding a new path to revenue growth. Will the CRM market continue to grow? Yeah, sure. But it's not the spectacular growth they need to drive the stock higher. From fiscal 2001 until fiscal 2011, Salesforce.com's revenue grew at a compounded annualized growth rate of 77% and, so far, the company has been modestly profitable. (And that's a nice way of saying that in the last twelve months CRM has a negative 1.39% operating margin.) While most analysts forecast mid-30% annual revenue growth for the company, it really needs to grow up. Its competitors are entrenched and hugely profitable (operating margins in the mid-30s). This won't be easy from now on.

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