(CRM): Checks Strong, But Exposed To Slowing Economy (CRM), the software-as-a-service CRM company, has seen its stock fall precipitously since disappointing deferred revenue marred its Q2 earnings announcement last week. Citi analyst Brent Thill’s valuation of the the stock hasn’t changed, so he has upgraded to BUY while maintaining his $70 target. We agree with most of his logic, but think the market is right to be concerned.

Thill’s thesis is based on:

  • Valuation – stock down 13% in 3 days since earnings, even after short-covering; trades at 24x CY09 FCF/share vs. 30% 3-yr CAGR (CY07-10)
  • 2H seasonality – Sep. & Oct. are historically strongest months for CRM stock (+18% & +14% avg. in 2004- 2007)
  • Big deal pipeline bodes well for 2H bookings – Our checks indicate an impressive list of large enterprises in the pipeline, which could lead to a strong finish to the year despite the macro environment.

That’s fine logic, but if the reason for the deferred revenue shortfall was what it usually is–sagging demand–the market is smart to be cautious. As companies try to maintain margins in the face of declining consumer spending, IT budgets will come under pressure. This won’t kill CRM, obviously, but it could slow its growth. And that alone is reason enough to expect sustained multiple compression.

Citi upgrades (CRM) from Hold to BUY, target $70.

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