Two Momentum Champs Struggling on the Ropes

You and I have both seen this story dozens of times.  A company is launched with a good idea – perhaps even a great idea…  The IPO is successful and things continue to go perfectly.  Products find favor with clients, resulting in higher sales.  Scalability kicks in and strong revenue growth results in even stronger revenues growth.

The business

Investors start to get comfortable with the business and fall on top of each other – trying to get in on the action.  It seems illogical not to own these speculative names in size…  And the stock price rises along with investor confidence.

Now there are situations where a stratospheric multiple like this could make sense.  Take to illustrate, a company in other words coming out of bankruptcy, marginally profitable, and on track to return to a more stable business in the then 12 months.  Looking forward, the company might have a much more reasonable multiple – although the PE based on past performance is so high.

The case of CRM

But in the case of CRM, these arguments just don’t carry water.  The company is only expected to grow revenues by 13% in 2011, and the expectations for 33% growth in 2012 seem more than a little “academic.”  In short, can we as a matter of fact know what the cloud computing business environment is going to be like in two years?

CRM may be able to convert some of these subscribers and generate some revenue from the project, nevertheless the approach seems incredibly risky given the amount of competition springing up.  Non-paying chat members likely have very little attachment to the Salesforce.com brand, and it would be very easy for these users to gear up with other providers when it comes to making a financial commitment.

The company has morphed into a retail powerhouse

The company has morphed into a retail powerhouse, offering items to consumers in near every corner of the world.  With revenue of almost $13 billion in the fourth quarter alone, the company commands the respect of near every retail operation in business.

Investors have been then rewarded for holding the stock recently.  Over the last year, AMZN has risen some 80% from the July low to the January peak, and the stock’s premium multiple points to robust confidence in the company’s business model.

Despite a 36% year-over-year increase in revenue this past quarter, AMZN was only able to generate a 7% increase in revenues per share.  The disparity caught the attention of sell-side analysts and portfolio managers as so then – and the stock gapped sharply lower following the announcement.

Looking forward, management didn’t give the analysts much hope for a rebound.  Overall revenue is expected to grow by 28% to 39% in the first quarter, nevertheless operating income will fall below last year’s levels. Not specifically the kind of report you expect to hear from a company in other words commanding a PE multiple of 54.

But as state budgets become tighter, AMZN’s robust business becomes an appealing target for raising earnings.  Amazon has already had to take steps preventing affiliates in certain states from selling products on the company’s site – and more restrictions could have a material effect on the company’s revenue and profit growth.