Earnings

A Side-by-side Analysis of Salesforce.com, inc. (CRM) and Cornerstone OnDemand, Inc. (CSOD)

Salesforce.com, inc. (NYSE:CRM) and Cornerstone OnDemand, Inc. (NASDAQ:CSOD) are the two most active stocks in the Application Software industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. Salesforce.com, inc. (CRM) has an EBITDA margin of 12.32%, compared to an EBITDA margin of  for Cornerstone OnDemand, Inc. (CSOD). This suggests that CRM underlying business is more profitable. CRM’s ROI is 2.10% while CSOD has a ROI of -21.70%. The interpretation is that CRM’s business generates a higher return on investment than CSOD’s.

Cash Flow 



Earnings don’t always accurately reflect the amount of cash that a company brings in. CRM’s free cash flow (“FCF”) per share for the trailing twelve months was +0.28. Comparatively, CSOD’s free cash flow per share was +0.01. On a percent-of-sales basis, CRM’s free cash flow was 2.4% while CSOD converted 0% of its revenues into cash flow. This means that, for a given level of sales, CRM is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios are important because they reveal the financial health of a company. CRM has a current ratio of 0.80 compared to 0.90 for CSOD. This means that CSOD can more easily cover its most immediate liabilities over the next twelve months. CRM’s debt-to-equity ratio is 0.31 versus a D/E of 8.22 for CSOD. CSOD is therefore the more solvent of the two companies, and has lower financial risk.




Valuation

CRM trades at a forward P/E of 55.60, a P/B of 7.97, and a P/S of 7.30, compared to a forward P/E of 55.65, a P/B of 78.98, and a P/S of 5.18 for CSOD. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. CRM is currently priced at a -11.76% to its one-year price target of $107.24. Comparatively, CSOD is -7.19% relative to its price target of $44.25. This suggests that CRM is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 1.90 for CRM and 2.50 for CSOD, which implies that analysts are more bullish on the outlook for CSOD.

Risk and Volatility

Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. CRM has a beta of 1.25 and CSOD’s beta is 0.56. CSOD’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. CRM has a short ratio of 4.27 compared to a short interest of 6.33 for CSOD. This implies that the market is currently less bearish on the outlook for CRM.

Summary

Salesforce.com, inc. (NYSE:CRM) beats Cornerstone OnDemand, Inc. (NASDAQ:CSOD) on a total of 10 of the 13 factors compared between the two stocks. CRM is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, CRM is the cheaper of the two stocks on an earnings and book value, CRM is more undervalued relative to its price target. Finally, CRM has better sentiment signals based on short interest.

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