Salesforce.com Trending Strong

Salesforce.com, Inc. (CRM) is the market leader in the on-demand Customer Relationship Management (CRM) space and continues to see substantial subscriber and customer growth.

While the company reported strong second half results and raised full-year revenue guidance, dilution from the InStranet acquisition will result in lower than expected second half EPS. Although this will penalize the stock, we believe InStranet makes strategic sense, and over the long-term EPS growth will accelerate. We therefore reiterate our Buy rating on Salesforce.com's shares.

We believe a price-to-sales [P/S] multiple is an appropriate valuation metric for Salesforce.com shares given the early stage of the company and its software-centric business. Traditionally, leading software providers trade in a range of 5x to 15x revenue. On our FY 2009 revenue estimate of $1,072.7 million, or $8.93 per share, the stock is trading at a P/S multiple of 7.3.

We believe the stock can approach a P/S multiple of at least 9x over the long-term as the leader in the space. We set a price target of $83.00, representing a P/S multiple of 9.3 with our 2009 revenue estimate, which we believe Salesforce.com can reach over the next six months.

Although profit margins are currently very low for Salesforce.com, Return on Equity (ROE) is trending in the right direction. Over the next several years, we expect Salesforce.com to approach a healthy level of ROE as expected of a company in the software industry.

Read the full analyst report on CRM

Read the full analyst report on CRM