The Music is Over!
Wednesday, December 13, 2006 | Wayne MulliganRating:
How do you know when the music’s over?How do you know when to run?
How do you know when it’s time to get out of a stock?
These are the questions I’m going to answer today, and I’m going to use a stock I’ve talked about in the past as a prime example.
If you had checked the technology news section on most finance sites yesterday, you would’ve seen that SalesForce.com (NYSE: CRM) made two major announcements:
- The company announced that instead of just building and marketing its own software, it will now be entering the business of reselling other developers’ software for a commission.
- SalesForce then raised its revenue outlook for 2008 because of how optimistic the company is about its new “strategy”.
Strategy, my foot!
This company is simply flailing its arms and trying to catch itself while its business is headed for a cliff.
Let me tell you what I mean…
Here we have a company that made its name by creating a “disruptive” technology in its industry.
What I mean by “disruptive” is SalesForce.com’s software shook up the entire Customer Relationship Management (CRM) software space. The company built its business on innovating a new way of doing things, and it was very successful at it.
But now that SalesForce is losing ground to new competitors, and now that it’s seeing its business go down the tubes, it’s trying to come up with a clever way to “patch things up”.
I look at it as the equivalent of sticking your finger in a hole at the side of a dam – you’re eventually going to get crushed.
Here’s why…
SalesForce just doesn’t seem to “get it” – the company produces a piece of software that’s fairly easy to duplicate. That’s why start-ups like Entellium can come along, charge half the price of SalesForce, and start stealing customers away.
The problem with the stand-alone software business is it lacks any real barriers to entry. I mean, these days, anybody can set up an account on oDesk.com or Elance.com, find a developer from Russia or India and get a sophisticated site developed for a couple of thousand dollars.
The only thing that saves most web-based software companies is the “network effect” – software like MySpace.com which is owned by News Corp. (NYSE: NWS) is a perfect example.
The site is valuable – but not because of its technology – because of the amount of users it has in its network. Individual consumers place a high value on sites like this.
Businesses, on the other hand, only place value on dollars and cents. So if a competitor can give them a comparable service for less cost, then they’ll eventually move to the competitor.
So now SalesForce, in an attempt to save itself, is offering to help market other developers’ software products.
This sounds good and all – but where’s the competitive advantage?
What makes SalesForce.com better than anybody else at marketing software?
What’s to stop a million other companies from doing the same thing? And why wouldn’t SalesForce.com’s clients just use every single one of the other guys that will come along and copy SalesForce.com’s model?
Like I said, this is a “finger in the dam” strategy.
This stock is still trading at a ridiculous P/E, it’s still in a very vulnerable position, and just because the company issued an increased revenue forecast doesn’t make it any smarter to invest in it!
I mean, how in the world is this company going to say that its product is going to generate revenues to the tune of $10 - $20 million in 2008? It’s not even 2007 yet!
It’s an overly bullish and premature prediction on the part of the company – and if I were a really suspicious person, I’d say that the company was just trying to bolster its stock price so the executives could sell some shares at this astronomical valuation.
I’m not saying all that now, but what I am saying is that this is a clear signal that:
A) The music’s over.
B) It’s time to run.
C) It’s time to get out of this stock!
Any questions?
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Wayne Mulligan
Contributing Editor
The Tycoon Report
