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By Erik Kobayashi-Solomon | 08-16-2010 02:53 PM

Salesforce.com: Good Business but Pricey Stock

Morningstar's Sunit Gogia thinks the software as a service provider has a bright future but that investors are underestimating challenges facing the firm.

Securities mentioned in this video
CSCO Cisco Systems Inc
CRM Salesforce.com Inc
SAP SAP SE

Erik Kobayashi-Solomon: Hi, I'm Erik Kobayashi-Solomon, Co-Editor of Morningstar's OptionInvestor. Today, it's my great pleasure to welcome Sunit Gogia, who is Senior Analyst in charge of software companies here at Morningstar.

Sunit, thanks for coming.

Sunit Gogia: Thanks for having me.

Kobayashi-Solomon: So, just recently I wrote a bearish article or an article describing a bearish option strategy on a company that you cover Salesforce.com, and just want to ask you a little bit about that today.

So Salesforce.com is involved – they have a model called Software as a Service, people call it SaaS. So what is SaaS? Why should I care about it as an investor?

Gogia: So, software as a service is a delivery model where software is delivered online over the Internet and customers can access it typically using a web browser, without the need to install any software on their end. So most people are already familiar with this maybe without realizing it. Most people use a free email service like maybe Gmail or Yahoo! or Hotmail.

Kobayashi-Solomon: I was just going to say, so it's kind of the Gmail model versus Outlook and installing Outlook on your…

Gogia: Precisely. When you are using Gmail, you are just pointing your web browser to gmail.com, logging in and using the service, without installing anything. That is software as a service.

Kobayashi-Solomon: So I'm guessing it's probably most useful for kind of smaller businesses, businesses that don't have a huge budget for IT implementations or something?

Gogia: That's definitely a good starting point. Since we're talking about Salesforce.com, Salesforce.com software enables customers to manage sales leads, manage their sales pipeline. Now in the traditional model before Salesforce.com came along, customers that wanted to do that had to basically by, let's say Oracle Siebel software, maybe acquire a server from HP or IBM, hire IT people to install the software to maintain it.

Kobayashi-Solomon: So a ton of upfront investment, just to get up and running.

Gogia: Exactly. All of these are upfront capital expenditures. Now with Salesforce.com, the customer can simply point their web browser to Salesforce.com, login and start using the service. They don't have to acquire any software, they don't have to acquire any servers. But unlike for example Gmail, Salesforce.com needs to make money, so they charge an annual subscription fee.

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