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Salesforce.com, Inc Message Board

  • climbwitharope climbwitharope Aug 17, 2011 7:44 AM Flag

    Why should you sell CRM now?

    I am not talking about CRM's bubble valuation. Everyone knows by now that CRM is overvalued, only fools argue with that.

    There is actually a better reason for expecting a steep decline of the stock. A reason that is not widely understood, especially not by the retail investor. It has to do with CRM's trickery of pushing NON GAAP earnings versus GAAP earnings. No matter how you slice it, the valuation of a stock is partly and traditionally measured by its Price/Earnings ratio (PE). All analysts and authors agree that the PE of CRM is very high. The higher the PE, the more overvalued a stock is regarded.

    The majority does not realize that the PE of CRM is calculated on GAAP earnings. Thus not on the NON GAAP earnings the company is promoting. These NON GAAP earnings are actually declining, but the markets have been forgiving thusfar because revenues are still rising. However, the picture is even worse for the real (GAAP) earnings. GAAP earnings are projected to be negative for this quarter and for the full year. This means that the company will be losing money from now on. But is also means that the PE will rise over the next 12 months.

    Even the analysts do not get it, for thay are stating the trailing PE based on GAAP, and the forward PE based on NON GAAP, thereby falsely suggesting the company will be growing its profits, while nothing is farther from the truth. The forward PE is therefore stated as lower, thus "better" than the trailing PE. You can even see this on Yahoo Finance:


    However, that forward PE of 70 will be corrected to the trailing PE after next earnings. Were it is now in the 300 range, it will grow to 1000 over the next months.

    So? The overvaluation will soon be considered as outrageous. This will be unforgiving for a so called growth stock valued at 11 times the sales. At first many people won't understand why the PE is rising even more, while the stock price remains the same. But eventually they will figure out the reason: That the company and its analysts have been promoting fake NON GAAP earnings, while the true GAAP earnings are actually declining to losses. Losses that are actually caused by compensating the management employees with stock options, diluting the stock. Once the public understands they have been deceived, piling up their money into a bubble "growth" stock, that isn't growing shareholder value at all, they will flee the stock in droves.

    This post is a fair warning to everyone who doesn't see it coming that this stock will be cut in half (at least) over the next twelve months. There is always a chance I may be wrong, but I don't think so. If you agree and act now, thank me in 12 months.

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