Business models with the FT

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Salesforce and Expedia highlight valuation disparity

Do the obsessions of stock market investors make sense, in the eighth summer of a long rally for the S&P 500?

Consider Salesforce, a company that has always been “expensive” thanks to excitement about the potential for its business: software sold as a subscription service, rather than a simple product which is licensed. Sales have quadrupled in five years, helped by a few acquisitions, so the company is valued at a cool $53bn, eight times the revenue it reported last year.

Then there is Expedia, a travel agent. It too offers a fast-growing online service, doubling sales in the past five years, also helped by acquisitions. Yet the perception is that vicious competition for hotel bookings and car hire makes the business harder to expand and less valuable than software. At $19bn, about three times sales is the considered value judgment of the market, including debt.

It does not help Expedia’s case that it actually make profits, $765m last year. Salesforce has lost money in each of the past five years, an accumulated deficit of more than $800m. Shareholders are free to imagine what might one day come, untroubled by the reality of profit margins.

Expedia has also repurchased shares over the same period, a sign perhaps of diligent maturity. Salesforce has given away a fifth of the company, in takeovers and to its staff as a form of pay, a practice that seems to be treated as signal of its great future.

Yet in one way the companies are identical. Both reported sales of $6.7bn last year, and spent half that amount on sales and marketing to persuade customers to show up, a greater proportion than any other member of the S&P 500, according to data from S&P Capital IQ.

Salesforce also spent a dollar on marketing for every two it made in sales back when it was a quarter of the size. For a company with a great future, it appears to work very hard to find and retain customers. As Expedia fights Priceline and TripAdvisor, so must Salesforce surely battle larger rivals Oracle and Microsoft.

As for the valuation disparity, perhaps it reflects a more general lack of fast-growing companies to buy, or a sort of investment muscle memory about the type of business that is supposed to excite.


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