Salesforce.com Inc. (CRM) introduced an overhauled version of its mobile software, seeking to ensure clients and partners will be able to use more features of the company’s sales, marketing and customer service software.
Ok. Sounds like this is a good company. But that’s not the question — the question is whether you should consider investing in it.
Salesforce is projected to report a 34 percent climb in revenue to $1.06 billion for the quarter that ended in October, according to the average of analysts’ estimates compiled by Bloomberg. Earnings excluding some items are projected to rise 4.8 percent to 9 cents a share.
So let me see — revenues are climbing (a lot) but profits, that is, earnings, are going up at a much slower rate.
And on a five year forward projection P/E/G is over 6. At 9 cents/share per quarter x 4 quarter we have 36 cents/year of earnings but the stock sells for around $58 this morning.
Or 161 times, roughly, earnings.
Note that earnings are rising at just under 5%, so you’re paying thirty-two times the growth rate — that’s not a P/E/G of 6, it’s one of 32!
This company is not alone in this sort of “valuation.” Amazon is even worse, not to mention Farcebook and LinkedIn.
Of course the premise all of these folks sell you is that they’re going to take over the world. The article referenced sounds an awful lot like that. It always does.
But in order to justify this sort of thing on an industry basis all of these pumped-up pieces of crap have to take over the world at the same time.
The problem is that the world isn’t that big — that is, there’s nowhere near enough GDP to actually fulfill these claims.
This is exactly what happened in 1999, and in fact today it’s worse than it was then. And just like in 1999 utterly nobody in the mainstream media is pointing out that if you look at the maximum reasonable amount of GDP that these firms can constitute (after all you have to actually produce something with your company that uses these products and services — right?) you wind up with a mathematical impossibility at the valuations being expressed — by a factor of 10 or more.
How far does this crap go before it collapses? Hell if I know. But what I do know is that what is impossible won’t happen, and therefore we are simply counting out time before someone stands up, raises their hand and asks the impertinent question: How is it that you can possibly justify where your stock trades, given the actual and believable rates of expansion squared against the actual economic output you can capture?
That’s the day the market crashes.
Not corrects a bit, crashes.
Because when you’re overvalued by a factor of 10 or more what comes is not a correction.
It’s a crash.
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