Salesforce.com: J.P. Morgan Starts At Neutral; Cautious On Valuation


J.P. Morgan analyst John DiFucci this morning picked up coverage of Salesforce.com with a Neutral rating and $140 price target, not much above yesterday’s close at $139.45. His sole concern with the stock is the one that often comes up with the software-as-a-service giant: valuation.

“While there could be material upside from here if the company is able to penetrate new markets, we believe the upside is offset by a similar level of risk,” he writes in a research note.

DiFucci contends that the software-as-a-service approach “makes even more sense today that it has in the past, as recent computing advances make it a more viable alternative for many more users.” He notes that the company has become the leader in salesforce automation, and that it should continue to gain share while extending into adjacent markets like marketing automation and customer service, where penetration rates are much lower. He notes that growth at the company is “nothing short of stellar,” particularly given the company has a revenue run rate of over $2 billion.

The paradox of Salesforce.com, he says, is that cash flow could be higher if it didn’t have such a high appetite for growth. “To be clear, we think management is acting appropriately at this time given the huge opportunity in front of it,” he writes. “But, we are mindful that if growth does not continue, what today looks like the aggressive pursuit of opportunity could be viewed as imprudence. This scenario could provide a chance to own an attractive franchise rather than what might look like the demise of
a high flyer.”

He contends the stock – trading at 110x consensus calendar 2011 EPS estimates – is “fairly valued at current levels.”

CRM this morning is up $1.65, or 1.2%, to $141.10.

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