I would not recommend shorting CRM into the quarterly report tonight after the recent damage. This stock and the tech tape are likely to put on a rally over the next several weeks. However, long term I think the 30% revenue growth rate for this company is too high and management will be lowering that objective sometime over the next few quarters. How do I know this? Primarily because last quarter Graham Smith the CFO announced that he is retiring. When I was managing money Graham told me three years ago that there was nothing but green fields ahead of them and that they were on the path to being a $10 billion company on a revenue run rate. What changed? Clearly Graham sees something that we don’t see. When I met with him he was enthusiastic and truly pumped up. Since then the company has gone on an acquisition spree. The largest most recent one was Exact Target. What I found curious is that the management team of Exact Target took cash and not CRM paper. Perhaps they see the same thing that Graham sees as well. The multiple that one places on acquisition growth is lower than organic growth.
The major problem is that the CEO Marc Benioff is a crazy maniac founder who still thinks that his company can grow at at the current growth guidance of 30%. When you are a founder/evangelist you need to be a maniac to sell the vision because you are literally creating the market. That dynamic changes when you become a $4 billion revenue company. Marc has arrogantly decided that his company can continue to grow at a rate that can double revenues every 2.5 years. Unfortunately the law of large numbers is catching up with Marc and he is willing to do very dilutive acquisitions to maintain this unrealistic growth pace. I think Graham has likely tried to talk to Marc about this issue but Marc is insane and refuses to listen. Hence Graham got tired and decided to cash out before the company goes splat into a growth expectations wall. I think we saw the long term top in February and this stock is in short the rallies mode. It would not surprise me to see this stock play the back nine at some point over the next two years. Another sign of a top is that they just moved into their 40 story downtown San Fran office space. The completion of Taj Mahal office space is a classic sign of a long term top in a tech company’s stock price.
On a side note we should be asking why the CFO of FB, David Ebersman, is stepping down. Forget the official story that was offered but who the hell leaves the fastest growing large cap tech company after two years? Maybe FB is a roman candle that burns brightly but only for a very short time. As a rule of thumb, I always trimmed or sold companies where the CFO left. I just find it very curious that two of the most prominent CFO’s in Tech are moving on. What could possibly be more exciting than the cloud or social media? I guess hitting the cash register before the deceleration phase would be my guess.
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