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1 Reason To Avoid Salesforce

Over the last couple months, I’ve shown you stocks to avoid…

Stocks to consider buying…

And some of the best stocks related to the coming Internet of Things…  Which you can find linked further below.

All these recommendations are to help you either avoid pain and terrible stocks.  Or to help you find potentially great stocks to invest in during this pandemic.

Doing both will help you earn higher than average investment returns and build your wealth.

There are few safe places to invest your capital today. And this number is growing smaller every day this crisis lasts.

The key to continue compounding your capital is to keep investing well over time… Combine this with dividends and you’re well on your way to building a retirement account you can live off.

And this is a huge part of things.

But another huge part of this is also losing as little capital as possible.

The fewer investment losses you have the more capital you keep. And the more capital you keep the faster you can invest well to grow your wealth.

But most only think of investing well. 

Today, I want to show you 1 Reason To Avoid Salesforce so you can continue building your wealth safely.

1 Reason To Avoid Salesforce

It’s Enormously Overvalued

Normally in these articles I talk about profitability, cash flow, the affects coronavirus is having on a company’s financials among other things.

But frankly none of those matter with Salesforce (CRM) due to its huge valuation.

Salesforce provides cloud computing solutions for businesses.  These solutions save their clients a ton of money by helping them avoid regular huge spending on upgrading hardware.

Due to the rapid increase in cloud computing solutions in the last decade its revenues exploded…  From $1.7 billion in 2010 to $19.4 billion in the last twelve months.

This is an increase of 10.4X in the last 10 years.

Which led to huge increases in profits and cash flows in this time.

Its net income rose from $64 million in 2010 to $2.4 billion in the last 12 months.  This is a 36.5X increase in the last 10 years.

And its free cash flow rose from $90 million in 2010 to $3.5 billion in the last 12 months.  This is a 37.9X increase in the last 10 years.

And this exponential growth in revenues, profits, and cash flows helped skyrocket Salesforce shares in this time.

From $18.44 per share at the beginning of 2010 to $256.16 per share as of this writing.

This is an increase of 12.9X or 1290%.

You’re doing well if you earn 10% investment returns per year on the stocks you own.  Salesforce produced investment returns of 129% per year on average over the last decade.

Its growth should continue as more businesses work digitally during and after this crisis.  Which is illustrated with Salesforce’s continued growth in revenues, profits, and cash flows even during this pandemic.

This is all great for Salesforce and its shareholders… But it also leads to a huge problem.

It’s massively overvalued.

Its P/E is 100.6.

Its current P/CF is 54.4.

And its current forward P/E is 67.6.

I look to buy companies with valuations below 20 on all these metrics to consider the company undervalued or at worst fairly valued…

Salesforce crushes this threshold.

Why below 20?

Because that means the company is at worst fairly valued… And if its significantly under 20 that means the company is undervalued.

When a stock is fairly valued or undervalued it gives you more margin of safety in investing terms.

This means you have better chances of earning higher returns owning its stock over time.  These combined make the stock a less risky investment.

With Salesforce stock being so overvalued it means there is no margin of safety… That you have a far lower likelihood of making money owning its stock over time.  And these make the stock riskier.

Does this mean I think Salesforce stock will crash and burn?

No.  I expect it to continue performing well going forward… But not as well as it did in the past due to its large valuation.

For the reason of its overvaluation I recommend you avoid its stock right now… There are safer, cheaper, and higher return stocks you can buy now.

Use the following links to some of our recent articles to see some of these stocks. 

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

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