What we can learn from Salesforce.com (again)

Salesforce.com (CRM), the granddaddy of all SaaS companies, has 17 years of price history that we can study and learn from. This was the first publicly traded company whose business model was primarily based on software sold as a subscription and delivered over the Internet. If your company has recurring revenues like this, your sales force (no pun intended) can take a do-nothing vacation in Hawaii for a year, and you would still generate roughly the same revenue as last year, as long as your operations and support team can keep your existing customers happy.

CRM just dropped over 26% from the November high. So its time for me to update a post I wrote last March, which was the last time CRM dropped more than 20%. In that post, I kept track of all 20%+ drawdowns in CRM since 2004, including the size of the drop, and the number of days to recover to the previous high. Here’s that post:


Some Facts About Salesforce
Salesforce went public in 2004 at a split-adjusted $3 per share. That looks cheap now, but it certainly was not cheap at the time. In fact, in 17 years, CRM has never traded at a P/E lower than 45, ever. Like most SaaS companies, CRM spent many years reporting losses because they were spending heavily to increase market share and product development. During the few years that they did report profits, the P/E ratio was well north of 100.

In 2006, their revenues hit $310M, and kept compounding at 45% annually, hitting over $1B just 3 years later. Revenues exceed $25B today, and the price is around $228, so it’s a 75-bagger since the IPO.

Now, let’s pause here. Only 10 months ago, revenues were $20B, and you had a 60-bagger after the price fell 23%. Now, the company has tacked on an additional $5B of TTM sales in less than a year, the stock has fallen 26%, and you have a 75-bagger! See how compounding works?

Those of us lucky enough to have been following this board for 3 years were able to buy a number of SaaS companies while they were still generating less than $300M in revenue, and have seen them grow beyond the $1B mark in sales.

Salesforce still manages to grow revenues at 27% annually, even now, on top of a revenue base of $25 billion. That’s more than 20 times the annual revenues most of our companies are at, and shows how early we still are with our picks. The thing about the SaaS business model is that the dominant first movers wind up taking most of the total addressable market share. It’s a “winner take most” industry. Most of the SaaS companies we own happen to be dominant first-movers. There’s no reason to sell any of them if a sector downdraft pulls them all down at once. The main reason to sell is if their earnings calls indicates a failure to deliver on their sales goals.

Ok, so we have here an example of a mature SaaS company, with recurring revenues, that’s been around for 17 years, and which would have grown your initial investment by 75x if you had held it since the IPO. But how easy would it have been to hold it for 17 years? That’s where your mental conviction comes in, as I’ll explain next.

CRM Drawdowns and Recoveries
As the table below shows, if you held CRM for 17 years, you experienced steep price drops of 20% or higher a total of 11 times. On average, you would experience such a price drop at least every other year. But the price has bounced back to the previous high every time, and the table shows how many days it took to bounce back.

Peak      Trough    Peak      Trough    Days to.          Recovery.  Days to
Date	  Date	    Price     price	Trough	Drawdown  Date	     Recover
11/7/04	  2/20/05   $5.00     $3.50 	105	-30%	  5/29/05	98
1/22/06	  7/16/06   $10.40    $5.48 	175	-47%	  10/8/06	84
12/23/07  2/3/08    $16.10    $12.70 	42	-21%	  3/30/08	56
6/8/08	  11/16/08  $18.20    $5.58 	161	-69%	  12/20/09     399
7/10/11	  12/18/11  $38.60    $24.50 	161	-37%	  3/25/12	98
2/9/14	  5/4/14    $63.60    $50.30 	84	-21%	  11/9/14      189
11/9/15	  2/7/16    $82.10    $59.70 	90	-27%	  5/29/16      112
9/23/18	  11/18/18  $159.00   $122.00 	56	-23%	  2/10/19	84
2/6/20	  3/29/20   $189.50   $134.30 	52	-29%	  6/8/20	71
8/23/20	  3/24/21   $271.00   $210.00 	213	-23%	  9/1/21       161
11/8/21.  1/5/22.   $309.86.  $227.67.  58.     -26%.     ?            ?
Average					        -37%		       135
Median					        -29%		       105

As you can see, after hitting the bottom price at the trough date, it took a median of 105 days (a little over 3 months) for the price to bounce back to the previous high. On one occasion, in 2014, it took about 6 months. And there was one outlier, the Great Financial Crisis of 2008, where it took a little over a year to recover. We happen to be in one of those drawdown periods now. Note, we only have 11 data points, and history may not repeat.

But I hope the above helps give you some perspective on things. Don’t get caught up in day to day stock price movements. Zoom out for the bigger picture.




Thanks for the thoughful post about CRM. It truly is a decent model for approximating what’s happening here. Although the market is different this time for the following reasons,

  1. SaaS is a thing now.
  2. Our economy is much more dependent upon these types of companies and there are many more of them now
  3. Macro conditions are not similar to other times in the past

I believe most of those differences can be considered as part of the natural run of things.

One quibble in your post regarding the latest point (trough).

This information is currently the trough. We do not know if it’s truly the bottom for this wave

The larger point holds that we are in a waiting game for this latest round of selling to wash through the system.

At what point and to what extent the reentry into these company becomes a sustained up trend is uncertain. But it looks like our model cannot really start the clock until we truly hit the bottom.

I’m not one for technical analysis, so I will not point out that several of our companies are working near fresh lows, currently. My feeling* is that our clock is still running negative days until the bottom is hit. At that point, I would return to your wonderful analysis to state the average and mean as a ballpark reference for reset on this sector.

*feeling - as in, worth not much more than the time you’ve already taken to read it.


Stock performance vs revenue growth rate

CRM is a good example on how stock price increase is directly related to revenue growth rate: the higher the revenue growth rate, the higher the stock price increase.

It also shows how a SaaS growth rate can evolve over the long term. CRM was in hyper growth mode in 2006: 76%/year. It quickly slowed to 21%/year in 2010 possibly due to 2008 recession then reaccelerated to 37%/year growth in 2012 then gradually slowed to steady growth rate of around 25%/year. CRM is an amazing SaaS company because of its ability to grow revenue at a respectable rate for a long time. Some SaaS companies grow for a short period and then in terminal decline to zero growth. It’s hard to predict how long the companies can grow. It’s the reason we sell out if companies slow too much. When we sell out, it doesn’t mean the companies we sold won’t do well in the future such as in the CRM case. Often, the companies continue to grow at around 20% to 30% over the long term and their stock prices reflect that. It means the probability of that to happen is lower. We want higher probability. Chances are if the SaaS companies have durable growth and expanding TAM as the economy grows, they can grow for a very long time!

Using CRM as example, I’ve selected 4 different time periods to compare revenue CAGR and stock CAGR:
Three 5 years periods: 2005 to 2010, 2010 to 2015, 2015 to 2020 and finally all 15 years: 2005 to 2020.

**Time period	Revenue 1(B)	Revenue 2(B)	Revenue CAGR	Stock price 1	Stock price 2	Stock CAGR	Revenue vs stock difference**
2005 to 2010	$0.18	        $1.31	         48.67%	         $4.15	         $18.70 	35.09%  	13.58%
2010 to 2015	$1.31	        $5.37	         32.62%    	 $18.70    	 $59.24 	25.95%  	6.67%
2015 to 2020	$5.37	        $17.10	         26.03%	         $59.24	         $166.99	23.02%	        3.01%
2005 to 2020	$0.18	        $17.10	         35.45%     	 $4.15	         $166.99	27.91%	        7.54%

See how closely stock price gain tracks revenue growth rate? It’s not exact and can be off by a few percent but if we invest in 60% grower and get a 50% return or 80% grower and get a 70% return even for a few years, it’ll beat the index return by a huge margin.

Stock prices closely track revenue growth rate over the long term. Stock price growth rate may lags revenue growth rate slightly during early years because of initial high valuation. It’ll gradually match the revenue growth rate. This is the basis for the board strategy of picking the companies with fast revenue growth and selling when they slow down.

So take comfort during every big selloff that if we own the best companies growing at 30%, 50%, 80% or even 100% per year during our holding periods, they will likely to generate similar return.(Not a guarantee depending on business model and market perception) so they will eventually come back higher.


Sorry I was in the wrong thread. It belongs here:

Is Salesforce really the best example?

I mean you cannot compare a company in its prime growth phase (organically!, like most of our stocks right now) with a company that has only grown through takeovers for years?


Salesforce observations:

1 Return on capital has averaged 2-3 percent a year for the last decade. (In contrast, although Apple does not have an SaaS revenue model, its ROC has averaged 30-45 percent a year for 15 years. This is why they can pay a dividend and repurchase billions in stock.)

2 TTM FCF is $(1,118)M on $25,000M of revenue

3 No dividend ever

4 No share buyback ever

5 Tangible book is $(369)M.

Perhaps CRM has operating leverage and its free cash flow is about to gush like the oil at Spindletop in 1901. But to date, the company looks like it sells dollar bills for $0.99 a piece.

Read the proxy and learn how management is rewarded. It’s revenue growth and OCF growth. But no deduction for the investment required to finance that growth.