Salesforce.com, Inc. (CRM) is the market leader in the on-demand CRM space and continues to see substantial subscriber and customer growth. Although the stock has been volatile, we believe over the long-term, CRM will be the leader in a potentially huge market for on-demand software.
Moreover, the company has had excellent traction into larger customers with thousands of subscribers, reflecting greater acceptance, and should continue to displace Siebel/Oracle (ORCL). We therefore reiterate our Buy recommendation on CRM shares with a six-month price target of $83.00.
We believe a price-to-sales multiple is an appropriate valuation metric for CRM 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 $1,033 million, or $8.68 per share, the stock is trading at a P/S multiple of 7.2x. Although the on-demand software model is inherently less profitable, CRM is beginning to show its operating leverage as revenue growth is rapidly outpacing cost of sales.
We believe the stock can approach a multiple of at least 9x revenue over the long-term as the leader in the space. We therefore maintain a Buy rating on the stock of Salesforce.com with a price target of $83.00, representing a P/S multiple of approximately 9.6x our 2009 revenue estimate, which we believe the stock can reach over the next six months.