Bliss In a Non-GAAP World: Salesforce.com Stock’s Amazing Rise

The stock market’s record high today – in the face of a still-crummy economy and a persistently high unemployment rate – may have you worried that investors are becoming, well, a little giddy. Nothing like the year 2000, certainly, nor even 2007, but all the same a tad happier than circumstances would seem to warrant.

Looking again at one of the market’s favorite stocks, Salesforce.com (CRM), which is up roughly 10% since announcing fiscal fourth-quarter results last week, and up 18% since we last wrote about the company’s affection for non-GAAP accounting results, on December 4, we are impressed by the extent to which investors seem to love revenue growth. Even when a company loses money.

CRM Chart

CRM data by YCharts

Selling dollar bills for 99 cents apiece has always been popular with customers, but is, of course, the road to financial ruin. Salesforce, led by the ebullient CEO Marc Benioff, spends lavishly on marketing and sales, with that expense category representing more than 50% of revenue. And while one would guess that Benioff’s sales team would grow more efficient over time, the opposite seems true: that expense rises faster than does revenue: 38% vs. 35% in the year ended January 31. Dis-economies of scale.

The R&D expense is rising more rapidly that revenue, too. And the result is net losses that, as one can see from the stock chart above, have widened in recent quarters.

Benioff is projecting more gangbusters growth for fiscal 2014, even if the increase will be a bit less dramatic than fiscal 2013. And he is also warning of more big net losses. Non-GAAP results – for goodness sakes, what reasonable person would include the cost of lavish stock options or of amortizing goodwill and other intangibles from acquisitions in corporate results – will be fabulous, however. So, in the make-believe world Benioff and other corporate chieftains prefer to dwell in, things are super.

What isn’t apparent is how our man, whose roughly 10 million Salesforce.com shares, make him a billionaire nearly twice over, plans to get to real profits. But then the stock market seems little concerned.

Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times. He can be reached at editor@ycharts.com.

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