Salesforce.com: A Steady Industry Leader And A Buy Taking Patent Dynamics Into Account – salesforce.com, inc. (NYSE:CRM)
Among the nearly 6,000 companies taken into account by Innovalpha (Nasdaq, NYSE, and Amex), Salesforce.com, Inc. (CRM) has been identified as one of the leaders across all industries taking into account company’s patent filing activity, in particular in relation to PCT (Patent Cooperation Treaty) applications. From PCT patent dynamics, Innovalpha provides a weekly patent index for all the 6,000 companies from which patent scores are computed as well as buy and sell signals and recommendations.
The investment thesis is that for companies like CRM:
1. Filing PCT patent applications outperform the ones which don’t in out of sample backtestings. Innovalpha is the first company to provide evidence of the strong intrinsic value of PCT patent applications per se. Why so? Because the PCT, administered by the World Intellectual Property Organization (WIPO), is used by nearly all companies worldwide whatever the industry. It is a standardized process used to facilitate patent protection on a global scale. Hence, companies use the PCT when they believe their inventions deserve extended patent protection (several countries). Further, the PCT publications are the earliest publications related to a company’s innovation, with only a 6-month delay between the filing date and the publication date. These two unique features represent exceptional advantages and explain to a large extent the outperformance measured by Innovalpha. Investors shall be much more attentive to PCT publications in their investment decision. However, several thousand PCTs are published each week rendering the patent analysis impossible without using automated tools and scores as provided by Innovalpha.
2. Displaying specific patent patterns/clusters, cycles of innovation, and fluctuations over time in the patent index will generate outperformance. The historical patent profile of a company, its patent dynamics, is a storyteller. Typically, a current intense patent filing activity over a defined period of time within a company, in contrast with a previous declining historical profile, will generate positive patent scores. If a company believes that it has developed a valuable invention, it will obviously try to secure such innovation with many patents, which will translate into what is called patent thickets/clusters, all detected by Innovalpha’s algorithms. The models built with related outperformance have been validated by out of sample backtestings, real track, and third-party confirmation.
What is essential to understand is that models relying on PCT patent applications capture forward-looking innovation (recent patent activity analyzed), new products that may or are in the process of being launched, which translate into strong market outperformance versus current methods relying on granted patents (past innovation and with inherent drawbacks, e.g. models using U.S. patents will be U.S. centric). For the above reasons, Innovalpha does not assess the value of a patent per se, which, in addition, is probably an impossible task even for a patent/field expert.
As a consequence, detection of companies with PCT clusters/patterns is of particular relevance for the investor, as one can expect such companies to develop and launch new products soon which will hopefully translate into higher market valuation (detection of promising innovation-driven and patent-centric companies). At the minimum, such recent patent patterns reflect management belief that such PCT innovation deserves consideration with consequently substantial financial and human resources allocated through increased patent-filing activity over a defined period of time, a clear indication of growth within a company which makes sense for the rationale as it underlies a sustainable innovation/business (actual innovation is a core/fundamental value of a company).
Indeed, alpha lies in expectations not in past innovation already part of companies’ market valuation. Further, our patent models show that patent size doesn’t matter (presently, the market doesn’t confer a value to important patent portfolios, on the contrary). As a consequence, big patent portfolios are not indicative of future stock market increase. We believe that the combination of Patent Dynamics with financial analyst opinions will increase the likelihood of stock outperformance. An important takeaway is therefore that the number of patents held by a company is not relevant, what matters is PCT patent dynamics.
Please see Innovalpha’s previous articles in order to understand the methodology used.
CRM is a PCT innovation-centric company as it files PCT applications with clusters/patterns identified (PCT patent dynamics), translating into positive patent scores as shown below which may materialize into new products and equity return. Here, in addition to CRM’s patent dynamics analysis, writer’s technical analysis is provided.
Five factors are taken into account in order to reach a conclusion:
- Company’s actual patent value scores
- Company’s historical patent profiles in relation to its stock price with trend & gap analysis
- Trends in patent activity in other regions
- Comparison with competitors (is the company an outlier or not)
- Company’s technical analysis
Figure 1 shows CRM’s scorecard displaying the patent index, grade, overall patent score, patent value, patent risk and patent disruptive scores.
CRM displays overall decent patent scores except for the disruptive score which represents evidence of the R&D/innovation activity within the company. The overall patent score of CRM is 108.6, which is above average and ranks the company seventh out of 292 (compared with companies in the same sector listed in the NYSE, NASDAQ and AMEX). The company is in Grade B, a very good grade (grades ranging from A to F, with A being the best grade).
Based on the historical data used, CRM is considered an innovation star, a midstage company that is disruptive with growth. It also indicates that CRM is in relation to all companies in the technology sector:
- in 15th position for its patent index,
- in 5th position for its patent value score, and
- in 14th position for its patent disruptive score,
- in 16th position for its patent risk score, as well as
- In 5th position for its overall score.
An increase in minimum values can be seen as it continues a steady trend higher. Investors shall definitively consider this company for further analysis.
Figure 1 – Salesforce.com, Inc. SCORECARD – Source: Innovalpha
Figure 2 displays a summary view of CRM’s patent scores.
Figure 2 – CRM portfolio view – Source: Innovalpha
Figure 3 displays CRM’s patent index and stock price over time. During the period from 2015 until Q2 of 2018, not much growth was seen for the index; however, during Q2 of 2018, it has increased substantially. Since then some further growth can be seen; however, for the past months both the price and index have remained flat indicating a period of stagnation for the company that is also reflected in its share price.
Figure 3 – CRM’s patent index and stock price over time – Source: Innovalpha
Figure 4 shows CRM’s overall patent score and its stock price over time, Figure 5 shows its patent value score and stock price over time and Figure 6 shows its patent disruptive score and stock price over time. The three graphs are very similar with steady growth in the past 2 years.
A strong correlation between the stock price and the patent value score is identified for most of the 5-year period and not much deviation in the form of a large gap can be seen. Indeed, a very little positive gap is currently identified between the patent value score and the stock price. This indicates that the company trades close to its fair value and therefore leads to think that the company does not offer an outstanding investment opportunity. Current trend in patent dynamics is neutral.
Figure 4 – CRM’s overall patent score over time – Source: Innovalpha
Figure 5 – CRM’s patent value score over time – Source: Innovalpha
Figure 6 – CRM’s patent disruptive score over time – Source: Innovalpha
WIPO indicates that CRM’s principal market in terms of patent protection is the USA, with only a very minor activity seen in PCT applications followed by some activity in Canada, Australia, China, Germany and India (see Figure 7). As expected, the USA is by far the country with most patent activity.
This trend of the USA being by far the leader remains constant throughout the years with other countries only accounting for very minor activity which indicates lack of diversification, but not surprising taking into account the sector of activity. Patent dynamics in the USA is in line with PCT applications, i.e., a constant increase since 2017, which is bullish.
In terms of the various classes under which CRM filed patent applications, the top three classes have remained pretty much constant throughout the 5-year period. An overwhelmingly large majority of patents were filed under G06F – electric digital data processing (computer systems based on specific computational models g06n), followed by H04L – transmission of digital information, e.g. telegraphic communication (arrangements common to telegraphic and telephonic communication h04m) and G06Q- data processing systems or methods, specially adapted for administrative, commercial, financial, managerial, supervisory or forecasting purposes; systems or methods specially adapted for administrative, commercial, financial, managerial, supervisory or forecasting purposes, not otherwise provided for.
A minor activity can be seen in various other related segments and has remained constant throughout the years indicating some lack of patent diversity.
Figure 7 – Top patent applications by region/country for CRM since 2015 – Source: WIPO
Figure 8 is a standard bubble chart showing Salesforce.com, Inc. on the left of the graph together with several other companies, with the overall patent score on the y-axis and patent index on the x-axis (in all the bubble charts below the size of the bubble is proportional to the PI index). As can be seen from this figure, the patent index, which is a measure of the size of the patent portfolio, is not the most appropriate way to identify interesting companies.
Figure 8 – CRM with overall patent score vs. patent index – Source: Innovalpha
In contrast, Figures 9 and 10 display CRM’s patent dynamics and clearly shows CRM as one of the industry leaders, representing useful views to immediately identify promising companies warranting further scrutiny.
Figure 9 displays overall patent score on the y-axis and disruptive score on the x-axis and Figure 10 displays the overall patent score on the y-axis and risk score on the x-axis.
Figures 9 and 10 clearly show as well that there are very few companies with both substantially positive patent value and disruptive scores, indicating that many companies within the field have not been able yet to put in place innovation management/strategy that creates value.
Figure 9 – CRM with overall patent score vs. patent disruptive score – Source: Innovalpha
Figure 10 – CRM with overall patent score vs. patent risk score – Source: Innovalpha
Figure 11 shows a long-term technical analysis of CRM. The overall trend is still bullish as the price has been setting higher highs and lows for the past decade.
At the beginning of this year a strong higher high was set at 195.72 USD. This was seen after several months of consolidation below the previous all-time high of 167.5 USD, however, was followed by a clear break below a several year trend line as well as previous major swing low of 140 USD.
Currently, the price seems to be rejecting further downside with a very strong rejection seen in the 3rd week of May after 115 USD previous support was briefly tested.
Therefore, overall CRM looks bullish and will likely provide an entry with good risk/reward potential unless further drop in the overall market is seen.
Figure 11 – Technical analysis of CRM – Source: Tradingview
- CRM displays impressive patent activity with 3 stars in patent risk score, 2.5 stars in value score, and a decent 2 stars in the disruptive score which ranks CRM seventh among competitors for all of the scores indicating a buy.
- CRM appears to be relatively strong when compared to the industry indicating a buy.
- Based on CRM’s historical patent profiles with the presence of a very little positive gap between patent value score and the stock price, investors should remain neutral for CRM as it appears to be at a fair value and in stagnation for the past year. Patent dynamics trend is also neutral.
- Market patent dynamics in the USA (principal patent activity market) are in line with PCT dynamics, which is positive. Patent activity within patent sectors of the company is stable, however with some lack of diversification.
- Technical analysis indicates a bullish rating in the upcoming months as the price has retraced significantly and shows strong signs of rejection for further downside.
- Therefore, the overall rating for CRM is bullish.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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