Stock Valuation: Inc. (CRM)

Name of Company Country of Origin/ Exchange Traded Sector Stock Price    
SALESFORCE.COM INC US/NYSE Technology – Application Software – Software – Application USD130.52    
@ 03 Jun 2018    
COMPANY PROFILE Inc is a software-as-a-service company that provides enterprise cloud computing solutions, offering social and mobile cloud apps and platform services, as well as professional services to facilitate the adoption of its solutions. is the largest pure-play software-as-a-service company in the world, offering customer relationship management applications around sales, customer service, marketing, and analytics. The company also offers a full-featured platform-as-a-service in addition to its application marketplace, AppExchange. Founded in 1999, has multiple application clouds that deliver more than $1 billion in annual revenue each, while sales are split roughly 75/25 between the Americas and the rest of the world.

Stock Code CRM    
Stock Valuation Below           Price to Sales Ratio

Companies that are trading at high Price to Sales ratios, like this company, do so because historical revenue growth has been high and investors are optimistic about future revenue growth. However, no company can continue to register the same high growth rates forever. Eventually it gets much bigger and growth rate will slow down. When that happens, one should adjust the expected future Price to Sales ratio in response to the expected slowdown in revenue growth and see if the current stock price is still justified, as what we have done below.
The Price to Sales Ratio is a commonly used valuation indicator for a stock. While not as popular as the Price to Earnings Ratio, it overcomes some of the limitations of the PE Ratio in that it can be used even when the company is not making a profit or only making minimal profits. However, it should not be used by itself because a company may be achieving sales but not profits. 
At the price of USD130.52 as at 03 Jun 2018, Salesforce.Com Inc is trading at a Price to Sales Ratio of 8.2 times last 12 months sales.  This is a 11.0%  premium to its historical average Price to Sales Ratio of 7.4 times. 
Is the stock overvalued? One should not just look at one indicator to determine the fair value of a stock. 
ProThinker believes in using a combination of valuation methods to decide whether a stock is over or undervalued? The five ratios we use are Price to Earnings, Price to Sales, Price to Cash Flow, Price to Book and Dividend Yield. We use multiple methods to value a stock because each has its benefits as well as shortcomings. Price to Earnings and Price to Cash Flow Ratios relate stock price to profitability but are meaningless when the comany has negative earnings or cash flows. Price to Sales Ratio is more stable because sales are never negative. However, this does not tell us whether the company is able to sell profitably. Price to Book Ratio gives us an indication as to how much we are paying for the company’s assets but it is not directly related to the company’s profitability. Dividend Yield cannot be used for companies that are paying little to no dividends.
While it is important to value stocks based on multiple valuation methods, this often leads to differing views on valuation. One indicator may suggest that a stock is overvalued while another suggest that it is undervalued. This does not help an investor who needs to make a definite decision whether to buy, hold or sell the stock. That is why we advocate the use of a Composite Valuation Indicator, which is derived from the best combination of the five indicators above. A Composite Valuation Indicator will give you ONE conclusion on whether a stock is under or over valued. 
To find out more about our valuation methodology, click here.             
Source of Data: Price to Sales chart is from ProThinker Stock Report. Company description, historical financial statements data and price data are from Estimates are from gurufocus and/or – Thomson Reuters.
Disclaimer: This report is for information purposes only and should not be considered a solicitation to buy or sell any security. Neither ProThinker nor any other party guarantees its accuracy or makes warranties regarding results from its usage. Redistribution is prohibited without the express written consent of ProThinker. Copyright(c) 2018. All rights reserved.