The Siebel War
The Bear Argument
By
Mike Trigg (TMF Tonto)
Nowadays, being bearish on Customer Relationship Management (CRM) software provider Siebel Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEBL)") else Response.Write("(Nasdaq: SEBL)") end if %> isn't very fashionable. The company's stranglehold on the CRM space is so tight, analysts have discovered a new favorite pastime: upgrading the stock. But despite the Street's fanfare, there's a different story to tell when it comes to the San Mateo, Calif. company. In fact, one can't help but draw parallels between the Washington Redskins and this company. Both are overrated and overvalued.
Clearly, Siebel is the gem of the CRM space. It boasts a dominant market share, distinct distribution capabilities, the broadest breadth of products and services, and a list of partnerships from here to eternity. Those and other reasons have afforded the company unsurpassed earnings growth and I'm sure Paul won't let you forget it. However, much like every other respectable company in the software space, Siebel's been afforded a colossal valuation.
Thus in the case of the slightest misstep, a significant market correction is imminent. So if you haven't figured it out yet, I'm bullish on this company, but bearish toward the stock. And for every Siebel shareholder out there who's sharpening his or her email sword and carving my name into their 10 Most Wanted list, I remind you of a popular generation X saying: "Hate the game, not the player."
All good things come to an end
The demand for CRM applications has grown faster than the New York Yankees payroll the last few years, as businesses have begun to Web-enable customer-based operations. With no end in site, the CRM space will remain one of the hottest sectors in the software sector. Siebel has taken advantage of this market phenomenon, and its stock price has increased nearly 500% over the last 52 weeks. Can this type of growth continue forever? I think not.
Those kinds of growth rates apply to emerging industries, and as the CRM space begins to mature, so will Siebel's revenues. Its recent emphasis on the mid-market and greater dependence on international sales signifies the company is well aware that the days of 100% revenue growth are coming to an end. Nevertheless, the question should be asked: How much longer will Siebel have to grow until it justifies its stock price? Growth duration helps answer that question.
Growth Duration
Fundamentals S&P 500 Siebel
P/E Ratio 27.97 273.24
Proj. Growth 10.55% 52.00%
Dividend Yield 1.14% 0.00%
Total Growth 11.69% 52.00%
Duration 7.4 yrs
Growth Duration = log (PE firm/ PE of the market) / log ((1+Total growth of firm)/ (1+Total growth of market))
From those calculations, Siebel would have to continue growing at a projected five-year annualized rate of more than 50% for over seven years to justify its current stock price. Thus these numbers only begin to scratch the surface of my argument. How can a Fool justify purchasing this stock at its current price? Every investor and their mother have caught on to Siebel's growth rates, and so far it's been one hell of a ride. However, as an industry begins to mature, things like execution, a sustainable business model, and competition enter the picture. For this Fool, there are just too many uncertainties to justify an investment at the current levels.
Quick... look behind you
The opportunities in the CRM space have created intense competition. Siebel is now forced to compete with niche providers plus Enterprise Resource Planning (ERP) and database companies such as SAP (NSYE: SAP) and Oracle <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %>. In fact, Oracle poses perhaps the biggest threat. By CEO Tom Siebel's own admission, his competitor has spent over $300 million dollars in market-penetration efforts. Oracle is serious about entering the customer-focused space. As recent Motley Fool Radio guest Chuck D might say, Oracle has got the capital to "Bring Tha Noize."
Previously, Siebel stumbled around the industry, snatching up market share. But there are early signs market share has suffered, particularly in sales force automation (SFA), where Oracle offers a comparable solution free-of-charge over the Internet. According to several competitors, recent Siebel losses include Excite@Home <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATHM)") else Response.Write("(Nasdaq: ATHM)") end if %>, Cisco <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>, BellSouth <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BLS)") else Response.Write("(NYSE: BLS)") end if %>, Bank of America <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %>, and 3COM <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %>. However, those announcements refer to only specific divisions choosing non-Siebel applications.
Oracle's release of 11i can also build separation from pure-play competitors. A fully integrated e-suite solution saves customers time and integration expense, as opposed to spending millions of dollars integrating applications from best-of-breed companies. A full suite also has tremendous implications for the middle market, which appears to be where the next CRM war will be fought. Smaller companies require less specialization and don't have the cash to spend millions integrating technology. Companies that earn less than $250 million in annualized revenue will find great value in a fully integrated end-to-end solution.
The edge of growth no one will talk about
The drawbacks of growth are also important to consider. For a company like Siebel, growth means added pressure to manage execution risk. Foolish Research Analyst John Del Vecchio has been hammering this point into Fools' heads for several months, and he'll discuss it further in his earnings report several weeks from now. Markets in levels of super-growth, such as CRM, encounter all sorts of twists and turns. A few lost deals to disgruntled corporate buyers and billions of dollars in market capitalization can be lost. I'm not sure about everyone else, but performing due diligence on a company's ability to handle bugs and glitches in software applications is easier said than done.
Finally, when a company trades at 300x earnings, investor confidence comes to mind, or should I say overconfidence. After 100% growth quarter after quarter, investor expectations are enormous. There are people that will continue to expect that kind of growth; when 50% revenue growth is reported, the stock will be adversely affected. That sounds stupid, but a lack of comparable quarters has a poisonous bite.
This company is only for a certain kind of investor. It's centered on a market that has yet to fully define itself. With a market capitalization of $41 billion, each Siebel employee is worth nearly $9 million. That's in stark contrast to Oracle and i2 <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ITWO)") else Response.Write("(Nasdaq: ITWO)") end if %>, whose employees are worth a mere $4 million and $6 million, respectively.
The company will continue its reign over the space in the near-term, but market share and revenue will begin to erode. Unreasonable investment expectations, managing growth, and increased competition lead this Fool to believe that Siebel will miss a beat at some point along the way. Do I think it's a good company? Yes, but that was never in doubt. The question to consider is whether or not this company can continue to dominate like it has in the past. The market is changing, and the answer is no. Therefore, at its current valuation, this stock isn't worth the bang for the buck.
The Bull Rebuttal »
