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Bear of the Day

Salesforce.com (CRM - Analyst Report) - Analyst Report) surged to new all-time highs this month after reporting a Q4 FY2013 adjusted loss per share of 2 cents, narrower than the Zacks Consensus Estimate of a 3 cent loss.

If that's the not-so-awful result investors were hoping for as they drove the stock up 10% from under $170 to over $186 since last Friday, then maybe they are happy with this company who could take another year to slowly return to profitability.

Salesforce.com is the giant $27 billion leader in on-demand business software services. The company's Salesforce suite of on-demand CRM applications allows customers to manage and share all of their sales, support, marketing and partner information on-demand.

Let's take a look at what might have cheered investors about their recent report and then we'll see why it fell to a Zacks #5 Rank (Strong Sell) afterwards.

Revenue Picture Encouraging

Revenues in the quarter were $834.7 million, up 32.0% from the year-ago quarter. The quarter’s result was also above the company's guidance range of $825.0 million to $830.0 million.

Salesforce witnessed an improvement in revenues from all its business segments. Subscription and support revenue was $785.5 million, up 32.0% on a year-over-year basis, while the Professional services and other revenue was $49.2 million, up 31.0% year over year.

Geographically, the company witnessed decent revenue growth in all of its operating regions. Revenue in the Americas was up 34.0% to $583.0 million, while Europe grew 37.0% to $149 million, and Asia logged a 17.0% boost to $103 million.

Before we look at the company's guidance, check out this projection of the long slow climb back to profitability...

Company Guides Sales into the Clouds

For the first quarter of FY2014, the company expects revenue in the range of $882 million to $887 million, expecting an increase of 27.0% to 28.0% year over year. This is clearly driven by their ability to upgrade business service offerings with new cloud-based applications in addition to attracting new clients.

For the full year 2014, revenue is expected in the range of $3.82 billion to $3.87 billion, up 25%-27% year over year. While there are a handful of analysts maintaining price targets over $200, like Deutsche Bank who praises the recent acquisition and integration of Heroku technology (no, I don't know what that is but it has something to do with developers being able to write programs that work with CRM stuff), the Street hasn't clamored to raise EPS estimates for the new year.

Until we see the estimates picture stabilize, I can't see adding to positions here, much less chasing new ones. And with the stock 23% over its 200-day moving average, those with profits might consider taking some off the table.

The Costs of Being the Giant

CRM's gross profit expanded 31.4% year over year to $651.3 million. Gross margin was 78.0%, down 40 basis points from the year-ago quarter. Those data points sound good. But investors also need to look at where that money is going, lest they find themselves married to an Amazon-like company of fat top lines and ever-thin bottom ones.

Total operating expenses rose 33.9% year over year to $672.1 million on the back of a 50.3% rise in research and development expense (R&D), 33.0% increase in sales and marketing expense, and 23.0% rise in general and administrative expense. Continuous increase in headcount from recent acquisitions drove the operating expenses higher.

Operating loss of $20.8 million during the quarter was more than the year-ago quarter's loss of $6.4 million.

Since CRM is the giant in this field and the costs of dominating in the cloud are probably high enough to reward its scale, investors who want exposure to this industry obviously can justify its enormous or nonexistent P/E.

But unless you understand their business very well, its probably a good time to step aside until the analysts who are experts here begin seeing greater profits down the road.

Kevin Cook is a Senior Stock Strategist with Zacks.com

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