Why Salesforce.com Stock Fell 12% in 2016

What happened

Software giant Salesforce.com (NYSE: CRM) dropped 12% last year, according to data provided by S&P Global Market Intelligence.

CRM data by YCharts.

The stock had slumped by as much as a third early in the year -- and was up by almost double digits after a strong second-quarter report. Yet it ended 2016 significantly trailing both rival Oracle (NYSE: ORCL) and the broader tech market.

So what

By all accounts, the company had a strong operating year. Revenue rose 27% in the first quarter, 26% in the second quarter, and 25% in the third quarter. The strong demand for enterprise software led Salesforce to boost its full-year outlook in each of those reports.

While it kicked off the year expecting just $8.1 billion of revenue, its latest projection calls for $8.4 billion. "No other enterprise software company is delivering consumer success at this scale -- and certainly not at this pace," Chief Operating Officer Keith Block told investors in November.

Image source: Getty Images.

Yet Oracle is challenging key parts of its business. It was recently ranked first in cloud software as a service (SaaS), passing Salesforce for the first time. Executives believe they can mount an even steeper challenge with their latest infrastructure-as-a-service offerings. Meanwhile, Oracle is enjoying far stronger profitability, with both gross and operating margins sitting well ahead of Salesforce's.

Now what

Even as competition heats up, Salesforce believes it will pass $10 billion of annual revenue in 2017. Size is important, since the first company to achieve dominant scale in cloud services will likely enjoy that prime market position, and the higher profits it entails, for years to come.

Investors can look for more details about its long-term plans when Salesforce posts fourth-quarter results in mid-February. It's expected to announce a 26% sales spike and earnings that improved to $0.25 per share from $0.19 a year ago.

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Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool owns shares of Oracle. The Motley Fool recommends Salesforce.com. The Motley Fool has a disclosure policy.