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The lure of Salesforce
After Google, Salesforce.com is the hot IPO to watch -- but that doesn't mean you should buy.
January 7, 2004: 3:30 PM EST
By Eric Hellweg, CNN/Money contributing columnist

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NEW YORK (CNN/Money) - Technology investors, by nature, are an impatient lot. Eager for the next product, unwilling to play to a mature market's pace, they want to see gains now.

Which is why the long, slow, will-they, won't-they, how-will-they run-up to Google's IPO has been positively killing them.

This impatience explains how Salesforce.com, a fine company in its own right, now finds itself in the odd position of acting as a canary in a coal mine for Google-watchers and the tech-investor community at large.

The company deserves to stand on its own, however, and regardless of Google (which everyone expects to hit the market in the first half of 2004), its IPO is one to watch.

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Salesforce.com offers hosted customer-relationship management services for companies that want a better way to manage their interactions with customers but don't necessarily want to take on the significant expense of purchasing and maintaining the infrastructure required to do so in-house.

Tech investors shouldn't assume, however, that just because the company is profitable and is warmed by Google's presence, it will be a surefire success.

Take a look at Orbitz's recent public offering. The company went public in December and failed to take off as many watchers had predicted. What's more, Salesforce just reported its first-ever profitable quarter.

According to its Securities and Exchange Commission filing, it reported revenue of $66 million during the nine months that ended Oct. 31, compared with $35.4 million for the same period a year ago.

Though its revenue growth is impressive, Salesforce faces some short- to-midterm challenges that investors should pay attention to before chasing down some shares.

First, it saw its biggest revenue growth at a time when the desire for its products was driven primarily by economic necessity. "Everything about hosted CRM that appealed to [recent buyers] had to do with low cost," says Denis Pombriant, a vice president and research director at Aberdeen Group.

"This cohort of frugal buyers entered the marketplace during a down economy, and all those factors encouraged people who might not have looked at hosted CRM to look at hosted CRM." Whether or not the cost savings that drove CRM adoption in the last couple of years will occupy as high a priority when the economy is rebounding is a primary concern for the company.

Second, Salesforce is fast becoming a victim of its own success, in that moneyed competitors such as IBM (IBM: Research, Estimates), SAP (SAP: Research, Estimates) and Siebel Systems (SEBL: Research, Estimates) are all pushing their own or partnered hosted CRM offerings.

Salesforce, which has done a good job of pitching its products, will face a large marketing challenge from the new competition and will need the IPO proceeds in part to beef up its marketing efforts.

Despite those concerns, several key factors are aligned in Salesforce.com's favor. Evidence suggests that the CRM growth experienced in the last couple of years may pale in comparison with growth that will occur in the near future.

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Research firm Aberdeen surveyed companies about their interest in purchasing hosted CRM offerings. A year ago, 52 percent said they were interested in hosted CRM. In the summer of 2003, that percentage had shot up to 85 percent. "We may have bracketed the tipping point," says Pombriant.

Salesforce has also done a great job of courting the small to midsize business (SMB) market, which the competition has largely ignored or has not been as successful at reaching. This was a smart strategic move, as budgets in the SMB space are freeing up faster than those in the larger enterprises.

Research firm IDC predicts that SMB technology budgets will grow 7 percent in 2004, up from a 5 percent growth in 2003. Larger enterprises are also seeing growth, but at least 3 percent less than the smaller companies.

By courting the smaller firms and developing its product during a down economy, when most large-scale CRM deployments were victims of budget woes, Salesforce received a rare chance to hone its marketing message and fine-tune its products.


"There's enough maturity in the offerings from Salesforce.com now that it will open up a market opportunity beyond the early adopters," says Gary Abbott, a managing director at Merriman Curhan Ford.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.