New Trade: Salesforce ($CRM) & Short Zillow ($Z)

By: ispeculatornew
Date posted: 06.21.2016 (3:46 am) | Write a Comment  (0 Comments)

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Today I am opening my 15th trade of the year between between 2 names that have been part of a lot of M&A activity and rumors. Things have been going well so far this year and as is always the case, you can see past 2016 (and previous years) trades here:

http://www.intelligentspeculator.net/livetrades

Let’s start off by looking at the numbers:

TickerNamePricePE RatioPE Next YearReturn YTDSales GrowthAnalyst ratingBook ValueBetaRevenue/ShareSales 5Y Avg GrowthEPS 5Y Avg Growth
ZZillow Group Inc34.76N/A73.0745.0297.823.86N/AN/AN/A76.34N/A
CRMsalesforce.com Inc81.22N/A61.082.6824.074.768.241.310.0830.74N/A

$CRMLong Salesforce ($CRM)

Salesforce is certainly an interesting company to follow. First off, as a SAAS company, traditional ratios such as price/earnings and even profitability numbers are not as useful. Why? Because Salesforce has a very significant portion of its cost upfront. There are several good readings that explain this but here is a short summary. If you are able to land a client for $50 of cost of sales, and can expect to make a $20 profit for 5 years, it’s a no-brainer right? It is, but the problem is that the first year, that client will show up as a losing money client. The more clients you land, the bigger the losses. That is until you start having more clients in those later years which bring in enough profits to compensate. All of that being said, I do think CRM trades at a higher valuation than I’d like but I think it is a good play in this context. It does have significant risk of being acquired, is a leader in its field and when compared to Zillow, I do feel like it’s valuation is attractive.

 

CRM_chart

 

Next earnings: August 17th 2016

$ZShort Zillow (Z)

Zillow is an interesting company and certainly has has a nice run in the past few weeks/months but it does have its fair share of haters as well including well known short seller Citron research. The company continues to grow at a very steady rate and has a nice niche. In some ways, I don’t love the idea of shorting Z but I do think its valuation is rich right now and that the risk vs. reward on this trade is worth it.

Z_chart

Next earnings: August 2nd 2016

Disclaimer: This trade on CRM-Z will be done on today’s opening,
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