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  • Writer's pictureIshfaaq Peerally


In 1999, Marc Benioff, one of the vice presidents of $ORCL, quit the company to launch his own company, $CRM . He was in his mid-twenties and VP of the second largest software company in the world after $MSFT, why did he decide to quit? He did not believe in software but believed in the cloud. Cloud computing itself was something nobody was interested in at that time, only in 2003, when $AMZN launched its cloud computing services, it became something interesting again. Now, everybody is fighting for market share in cloud computing from $IBM to $GOOG and even $ORCL .

Today, let's talk about $CRM , which pioneered this cloud computing revolution. What they actually do is CRM (Customer Relationship Management). Let's say you have a business and you are selling your products, you need data about your clients, potential clients you're targeting with ads, customer service. You can write all of this information on pieces of paper but you could also create a database on Microsoft Access. Now, what if you have a lot of data and you don't want to buy the equipment for storage, it would be simpler to use a cloud computing service. That's what Salesforce do. They are a vertical company, providing services for customer acquisition, sales, customer service and others. In cloud CRM, they are the leader, there is no doubt about that and they have been making major acquisitions over the years to extend their dominance. They are now going to acquire $DATA

If you look at the financial reports of Salesforce, you'll see that their total number of shares have been increasing over the years. That's because they have been diluting their shares and they do that for two main reasons:

1. To pay employees. If a company issues shares to pay employees, they can pay less in taxes. The same tactic is used by $AMZN

2. To buy other companies. When Salesforce acquire a company, they do this through an all-stock transaction. For example, with $DATA, each share of $DATA will be converted into 1.103 shares of $CRM after the merger. In this way, the company can keep cash. $TSLA also has been using this.

Why would a shareholder agree to diluting his shares in the company? Usually shareholders are happy when companies are buying back shares and increasing the value of their shares. Diluting shares make each share less valuable. Actually, in theory, it is true but because the stock price of $CRM has been increasing so rapidly over the last years that shareholders don't mind the fact that there is so much dilution. The same thing can be said about $AMZN shareholders.

Looking at the current price, however, for me $CRM is an expensive stock with a P/E ratio of 105. But it is a wonderful company and compared to $NFLX and many other $NSDQ100 stocks with such huge valuations, it does make some sense considering that they are the leader in their industry with little competition.

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