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Stock Strategist

New Territory Brings Risk for

The firm is aggressively pursuing revenue growth, but new product lines may be less lucrative.

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As the largest and one of the earliest software-as-a-service firms, (CRM) has defined a category. While our narrow Morningstar Economic Moat Rating is intact, the company is pursuing new avenues of growth that may prove to be less successful than its legacy applications. Our forecast for revenue growth in our discounted cash flow model results in a fair value estimate of $30, which equates to a 2014 enterprise value/sales multiple of 4.3 and an adjusted price/earnings multiple of 93. At today's stock price, we believe investors are very unlikely to earn an appropriate return.

When it comes to customer relationship management software, has built a better solution for thousands of customers. By building its application on the public cloud, the company drives down costs by supporting a common hardware, networking, and software platform and passing some of that savings along to customers. Customers have been able to avoid heavy capital investments they would have used to deploy on-premise software and instead have favored a predictable and manageable operating expense. Many customers have been eager to exchange operating expenses for capital expenses, as evidenced by a review of's financial statements--revenue grew from $96 million in 2004 to more than $2.2 billion in 2012, a 48% annual growth rate.

Rick Summer does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.