Salesforce.com Strategy Change: A Hail Mary Pass

Stock Tickers: CRM, ORCL, MSFT, SAP

Salesforce.com (CRM-NYSE) is trying an interesting strategy: it is splitting the need to buy its core product to use the company’s online market for business software.  This is intended to tap into the rising demand for web-delivered applications, but it is not without risk.

This is an opening up of its online marketplace for host business software applications without the requirement of being a client of Salesforce.com’s sales and marketing software.  This should allow the company to collect royalties from its platform on a much wider base.  It might even allow the company to sell more seats within organizations without the company itself having to build applications, and this will make the creation of more programs created for the online marketplace.

Perhaps this strategy will get the company closer as a real competitor for its web-based software and applications against Microsoft (MSFT), Oracle (ORCL), and SAP (SAP).  There has been talk and data pointing to this in the past, so now we’ll have to see how well the execution is. 

It has to make you wonder if this shows a maturing of its current model creating the need to split applications off in order to maintain its lofty growth demands.  This has been one of the high-multiple and high-beta stocks, and it no doubt knows the demands that Wall Street has on it to maintain their current prices.  The fiscal targets from Wall Street are demanding: JAN-2008 $0.42 EPS & $720+ million revenues; JAN-2009 $0.66 EPS & $985 million revenues.  Revenues for Fiscal JAN-2007 were $497 million on what boiled down to essentially break-even EPS results.  Compare this to the $4.8 Billion market cap based on a $41.75 stock price (52-week range $21.64 to $50.43), and you can see that the company has to do whatever it can to catch up to its valuations.

Jon C. Ogg
April 23, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.