All-Systems-Go For Salesforce.com

Salesforce.com (CRM) is an über-equity. Not only has it been a meal ticket for investors since it went public in 2004, but it also has the goods with its spoil of riches to make it the leader in the technology counterrevolution against companies of yesteryear in what is being dubbed as the turf battle for Cloud 2.0. The company has upped the ante by making many acquisitions in the past three years to bolster its offerings in the social media space for the enterprise. Jigsaw Data, Heroku, Dimdim, Manymoon, and, Radian6 are all recent newcomers to the expanding Salesforce.com family.

Conference calls are a lot like performance art, and, Salesforce.com CEO Marc Benioff is quite the orator with a fountain of information. In the May 19th, 2011, Q1 Conference Call, and, the August 18th, 2011, Q2 Conference Call, he gives his no-holds-barred opinion of the direction the company is taking. I got a real education in some of their new initiatives in Cloud 2.0. He also takes potshots at the competition, specifically companies like Microsoft (MSFT), Oracle (ORCL), and, SAP. Really spices up the presentations. For the majority of this posting, I will quote liberally from the two most recent earnings transcripts.

First of all, we need to set the record straight as to what exactly Cloud 2.0 is. Cloud 2.0 is Salesforce.com's strategic decision to bring social, mobile, and, open cloud technologies to the enterprise. They do this with a new service called Chatter. Chatter channels its inner Facebook and Twitter, and, brings them to corporations. As the 'mad scientist' of the cloud Benioff explains: "I'm thrilled to tell you more than 100,000 companies are now actively using Chatter, making it our most successful product introduction ever. We believe that Chatter is the largest, most actively used social network in the world. These aren't 100,000 trials, these are 100,000 active social networks.".

Chatter was released in June of 2010, and, ramped up very quickly because of Salesforce.com's base of over 100,000 clients that utilize their existing product portfolio of business software. The company has lofty horizons, too, because of their dominant position in enterprise software-as-a-service: "Of course, we're going to be the biggest cloud player, but we want to be one of the top five software companies in the world. That's our next goal. You've seen us pass $2 billion, you're going to see us pass $3 billion.", says Benioff, who is the co-founder, chairman, and, chief executive officer. He wears a lot of hats, and, he's not shy about throwing them in the ring.

Benioff talks more about Chatter as a selling tool to obtain his elevated ambition: "There is no sexier demo and no more exciting place to enter a company than with Chatter...We did not have a product that CEOs were using before. And when you see those CEOs using that product on their iPads, that is the kind of positioning we want that we want to be able to go into the C-suite with a strong clear message of, "How do increase your productivity, get your company going faster and get greater alignment and collaboration?" That's what Chatter is all about. But in terms of building a social enterprise, well, it's much more than just Chatter, it's about the Sales Cloud, The Service Cloud and Force.com, Heroku, Radian6 and all the other technology that we have.".

Chatter appears to be an incredible product, but has some limitations because it's an intra-organizational social media tool. However, the newly acquired Radian6 expands the Salesforce.com tentacles by not only amalgamating with Chatter, but, by increasing its functionality because its an extra-organizational social media platform. Benioff articulates: "We completed our purchase of Radian6, the leading platform for monitoring, engaging the millions of conversations happening every day on Facebook, on Twitter, on social communities, on websites. Soon, customers will be able to monitor and join in these public conversations from within our products, including Chatter.".

Later in the Q1 Q&A session, he goes on to say: "I think that Radian6 is a super-exciting product. I think we are extremely fortunate to be able to acquire this company. It's on a revenue tear, as you know. It's probably the fastest-growing of all the cloud computing companies that I've ever seen.". Fast-forward to the Q2 Q&A session, Benioff continues his praise for the newly absorbed company: "Radian6 is the first company we've bought where we really feel like it's transforming the company...But what Radian6 did was it opened our eyes to the opportunities in the social enterprise.".

In the conference calls for both Q1 and Q2, the CEO has choice words for his competitors. As an example, here is his assessment of Microsoft: "Our flagship, Sales Cloud, continued to crush the competition in the quarter. Microsoft's desperate strategy of underfunding, pricing with undifferentiated and highly proprietary products basically has had the same impact on our business as the Windows tablet and Zune did against the iPad and iPod. We call Microsoft's strategy, "the Zune strategy"...Customers continue to want visionary products that give them a competitive advantage, not the me-too Zune-type products locking them into these old, proprietary, desktop-driven platforms that are dying off.". Benioff expresses similar sentiment towards technology elder statesmen Oracle and SAP. Essentially, he's saying "put that in your pipe and smoke it.".

I originally covered Salesforce.com on February 17th, 2011, in an article Valuations Sky High For Cloud Leader, and as the title suggests, I thought that investors would have to pay a price premium for the stock. I did not recommend buying it. At the time of the writing, the stock was selling at $140/share. It currently trades at $126, 9.6% below what it was going for in February. It did get as high as $160 this Summer, but has since sold off along with the overall market. I prefer to own stocks for a number of years, not a number of days, so the month to month gyrations of the market aren't as critical to me as a short-term investor.

Looking at its current consensus earnings estimates on Yahoo Finance, we get $1.31/share, which gives it a P/E Ratio of 97. With an estimated 5 year CAGR (compound annual growth rate) of 28%, we get a PEG ratio of 3.5. That's very pricey, but we're heading into 2012, so let's look at the estimates for next year's numbers. For 2012, earnings are projected to be $1.83/share, which breaks down to a P/E Ratio of 69 and a PEG Ratio of 2.5. I still think that's too expensive, even for a quality company like Salesforce.com.

As far as analyst opinions on Yahoo Finance are concerned, 27 give it a buy or a strong buy, 11 say to hold the stock (which is not an endorsement), and, 3 go out on the limb and say to sell it. Cloud software stocks are hot right now, so you may want to play this sector. However, if you are more value oriented, and, still want to take advantage of a nascent industry, look to the infrastructure plays. Both NetApp (NTAP) and F5 Networks (FFIV) are selling at very reasonable valuations these days.

Alexion Pharmaceuticals Takes it to a New Height

Alexion Pharmaceuticals (ALXN) has bucked the recent downward trend in the market, rising from a price of $50.37/share on July 11th, to a close of $58/share on Friday, September 9th. During the same time-frame, the S&P 500 dropped from 1,319 to 1,154. In both the short-term and the long-term, Alexion has made investors a fistful of dollars, and, its recent position near the top of the Investor's Business Daily 50 has put it on the map in regards to mainstream press coverage. This is a plus for momentum investors.

I've always contended that when a security is high in the pecking order of the IBD 50, it's only a question of time before it begins to move quickly down the totem pole. However, investors have been awestruck with this biotech trailblazer, and, with an expanding pipeline of promising products, it could remain elevated in a holding pattern, or, continue on its meteoric path. The company has oozed money since it was trading for $3.30/share back in 2004. Will it continue to advance at breakneck speed? The jury is still out, but, I believe this a solid company and worth a closer examination.

What carries the load for Alexion Pharma is its flagship drug Soliris (eculizumab). "...Soliris, at $409,500 a year, is the world's most single expensive drug.", according to Matthew Herper in a February 22nd, 2010, article in Forbes titled The World's Most Expensive Drugs. "This monoclonal antibody drug treats a rare disorder in which the immune system destroys red blood cells at night. The disorder, paroxysymal nocturnal hemoglobinuria (PNH), hits 8,000 Americans...In the inverted world of drug pricing, the fewer the patients a drug helps, the more it costs. ".

Alexion specializes in medications for ultra-rare diseases, which at almost a half a million dollars per patient, has jolted both the top and bottom lines. A September 1st, 2011, Investor's Business Daily posting by Marilyn Much, Alexion Gains Mileage Expanding Footprint explains: "Ultra-rare diseases affect fewer than 20 people per 1 million of population and for which there are few, if any, treatment options.". In essence, you pay through the nose, or, suffer the consequences. This may mean life or death.

Unlike a controlled substance in a trial phase, Soliris has been on the market since 2007, and, most importantly, it works. CEO Dr. Leonard Bell points this out in a revelation in the April 21st, 2011, Q1 Conference Call: "...independent researchers earlier this month published two seminal observations in the journal Blood. First, that the survival of PNH patients treated with Soliris was markedly improved compared to a controlled population of PNH patients not treated with Soliris, and further, that survival of a Soliris treated patient was no different than the survival of a healthy, normal individual.". It's been a win-win situation, for both the patient, and, patient investors.

The big knock on Alexion Pharma is that they only have one medication in production. Although Soliris is approved in over 35 countries, and, is making inroads in Turkey, Brazil and Russia, it can only grow so much. That scenario will change very quickly if the FDA green-lights further uses for the drug.

Going back to the Marilyn Much article in Investor's Business Daily: "...Alexion isn't going to be a one-trick pony for long. The company expects the Food and Drug Administration to decide if Soliris can be marketed to treat another rare disease, atypical Hemolytic Uremic Syndrome, or aHUS, as early as this year's fourth quarter. The disease primarily affects kidney function. If approved, Alexion officials anticipate the U.S. launch of Soliris for aHUS during the same quarter.".

Alexion hasn't overdosed on publicity. It primarily flies under the radar because it doesn't produce a mass-market product, but recently got some nice press from the E coli epidemic that swept Germany this Spring. An article written by Gregory Seay on May 31st, 2011, in The Hartford Business Journal titled Alexion Treating Europe's E Coli Victims notes: "Alexion reports Tuesday in its 8-K filing to the Securities and Exchange Commission that its German subsidiary has been deluged with physician requests for eculizumab -- branded as Soliris -- to treat patients suffering from Shiga-toxin producing E. coli hemolytic uremic syndrome (STEC-HUS).".

The post goes on to say: "Alexion stressed in its filing that eculizumab is not approved for the treatment of STEC-HUS in Germany or elsewhere...the drug maker said it is supplying Soliris at no charge to physicians who request it for STEC-HUS patients.". What this means for the company is that if it is effective in treating the E coli, it could be put on the fast-track for approval here in the United States. This could open up the spigot for an additional revenue stream.

As is, the numbers on Alexion Pharma are extremely strong even without the additional revenue sources. Yahoo Finance earnings estimates gives the company $1.16/share for 2011, and, a whopping $1.59/share for 2012. This breaks down to P/E Ratios of 50 for the current year, and, 36 going forward. With a five year CAGR (compound annual growth rate) of 36.12%, we get PEG Ratios of 1.4 for the 2011, and, 1.0 for 2012. Those figures are very reasonable.

One caveat for the equity is the third quarter earnings which are supposed to be weaker than recent past performances. For the past 14 quarters, Alexion Pharmaceutical has had earnings growth higher than 15%. For Q3, which will come out at the end of October, earnings are slated to be just 12%. This may cause the wheels to come off the wagon, but just in the short-term. The company looks to be in good shape.

Analysts like this stock for a multitude of good reasons. Yahoo Finance analyst opinions break down to eight having a strong buy, six have a buy, and, seven say to hold the equity. Personally, I'm in the hold camp because September is historically a rough month for the market, and, then in October, Alexion could get whacked on an earnings let down.

Swimming Upstream With ON Semiconductor

Traders took another pound of flesh out of ON Semiconductor (ONNN) last week. The stock has done an about-face since mid May when it was selling at its 52 week high of $11.95 to close at $6.90 on Friday. Investors have really hung it out to dry, and, this may be shortsighted if you have a long term perspective. Its vital signs are strong. However, it may take a big leap of faith to pony up the dough for this mid-cap, especially for the next few quarters until it gets it in gear. Die-hard value investors might take a flier on it, if you can stomach the pain for awhile.

The company has experienced mitigating circumstances the past year that accounts for the sell-off, most notably the earthquake and tsunami that delivered a devastating blow to Japan. The company has approximately 35% of revenues derived its from Japanese customers, and, also has three fabrication plants there. ON Semiconductor managed the disruption from the natural disaster and nuclear catastrophe very well, and, the stock did not sell off immediately. What really took the steam out of it was when it was downgraded by Goldman Sachs (GS) a week after the Q1 conference call. A market correction that began in July compounded matters even worse, and, when you have a beta of 1.87, you're going to get crushed when the market tanks.

Then, there is also the issue of growing pains. On Semi pulled out all the stops the past few years in regards to acquisitions to bolster its product portfolio. According to Stephen Simpson in a May 10th, 2011 article in Investopedia titled ON Semiconductor Getting Bigger And Better: "...the company recently acquired the Sanyo semiconductor business, Cypress Semiconductor's (CY) CMOS image sensor business and Analog Device's (ADI) power PC controller business. These deals give the company new business opportunities, but also integration and efficiency leverage as well.".

The issue of integration is very important to ON Semi if they wish to hold themselves to a higher standard. As the August 8th, 2011 Standard & Poor's report by C. Montevirgen points out: "...as electronic products shrink in size, the growing need for smaller power solutions has led most to offer integrated offerings that include analog, digital and discrete products. The integrated products are more proprietary and generally provide better margins. Conversely, the discrete products tend to be more commoditized, and are exposed to periods of pricing deterioration and under an oversupply.".

In essence, they are utilizing the Texas Instruments (TXN) playbook, and, won't be as prone to the boom and bust cycles of the lower end semiconductor market with these new offerings. As ruling chieftain and CEO Keith Jackson states in the May 5th, Q1 conference call: "We remain well positioned for growth withing the smartphone applications. In the first quarter, we continued to ship our new power and thermal management products for smartphone market as well as our first micro USB integrated circuits for this segment...Additionally during the quarter, we shipped our first multi-chip module developed my our ASIC and MOSFET (metal oxide semiconductor field-effect transistor) teams to leading notebook suppliers...".

The primary selling point for On Semiconductor is that they are a power management company. Going back to the most recent Standard & Poor's report: "...power management chips are utilized to keep power usage in the device at efficient rates. This is especially important for gadgets that require a long battery life, such as a mobile handset or a tablet PC. Electronic equipment manufacturers are employing more power management chips and solutions in their devices, creating an attractive growth opportunity for power management semiconductor companies.".

An example of the opportunities in new markets that lie ahead for the company can be demonstrated in the appliance or 'white goods' industry. In the August 3rd, Q2 Conference Call, CEO Jackson sets the table for what looks to be a lucrative endeavor: "The consumer end market holds exciting growth potential for ON Semiconductor in the upcoming years as consumer white goods and appliance customers move to adopt variable speed motors with inverter power systems. These integrated power modules are designed to improve the energy efficiency of washers, dryers, refrigerators, air-conditioners and other appliances...In addition to the integrated power modules, our solutions include power supplies, user interface and communications chips linking appliances to the Smart Grid...we are well positioned the capitalize on this market opportunity.".

Although ON Semiconductor has a treasure trove of assets in regards to new profit channels, they may need to take their foot off the accelerator where acquisitions are concerned. As is, they won't be finished integrating and digesting the SANYO Semiconductor business operations until the end of 2012. SANYO Semiconductor was a big purchase for them - half a billion dollars - which is substantial for a mid-cap company. However, it does add $275 million to quarterly revenues. You may enhance your earning capacity by investing in On Semi at its current price, but much can happen between now and the end of 2012 when it finally finds its bearings.

At a price near $7/share, you might be led to believe that this equity has barrel-bottom ratings, but this is not the case. Yahoo Finance analyst opinions seem very bullish on this stock. Out of the 21 analysts that cover it, eight have a strong buy, five have a buy and eight have a hold. I would call that an endorsement, not a collective bias against it the way traders have been demonizing the company. However, it must be noted that three months ago analysts had a much more favorable slant on the equity with 17 out of 21 rating ON Semi as a buy or strong buy. Could be a buying opportunity if you are a bargain hunter.

To provide further color on this potential investment, let's get a snapshot of its metrics. Yahoo Finance consensus earnings estimates gives ON Semiconductor $1.02/share for 2011, and, $$1.19/share for 2012. This translates into P/E Ratios of 6.8 for this year, and, 5.8 going forward. Outstanding if you enjoy shopping at the discount store, especially when its estimated five year CAGR (compound annual growth rate) is 13.5%. However, revenues are projected to be flattish going from $3.6 billion in 2011 to $3.76 billion in 2012. This could put additional pressure on the security if the global economy doesn't pick up soon.

It's been a long time coming for this company. It went public in the late 1990's during the dot com boom when it was spun out from what was then called Motorola, and, had a brief period of success in 2000. However, it went into a tailspin when the entire market came crashing down in 2001, and, has yet to regain its prior elevation. I know the S&P 500 hasn't done much the past decade, but ON Semiconductor has done even worse, trading as low as $2/share just a couple of years ago. The company has a bright future ahead of it but needs to pass the Litmus test. It's all a question of timing.

I realize I'm not endearing myself with readers by not endorsing any stocks at this moment, but I'm out of the market now except with some short positions. Although ON Semiconductor isn't a household name like its major rival Texas Instruments, it may liftoff once the economy gets back on track. What is now comic relief, may give you the last laugh if you grab a piece of the action while the stock is deflated. Personally, I'm keeping my powder dry.