Salesforce: At a Promising Turning Point Thanks to AI and Efficiency Improvements

Salesforce, despite slowing revenue growth and tougher competition, has good prospects as an investment. The recently published results show solid growth of 10% year-over-year, although slower than in previous periods. New revenue also grew more slowly, reflecting the challenges of maintaining the previous pace of expansion. Financially, the company demonstrates strong operational performance with an improvement in the operating margin by 170 basis points to 33.7% in the second quarter. This led to an increase in the full-year margin forecast to 33.8%, indicating effective cost management and operational efficiency. The operating cash flow is expected to rise by 25% for the entire year, indicating strong cash generation. Salesforce returned $4.3 billion to shareholders through buybacks and dividends in the second quarter, emphasizing its commitment to value enhancement. Additionally, the remaining performance obligation (cRPO) grew by 10% year-over-year, surpassing both its own forecast and market expectations. Geographically, Salesforce recorded slower revenue growth in the Americas, attributed to a more challenging environment for small and medium-sized businesses and sectors such as technology and professional services, which are impacted by macroeconomic pressure and increased competition. On the AI front, Salesforce signed over 1,500 AI contracts during the quarter, with AI bookings doubling compared to the previous quarter. This suggests that AI is becoming an increasingly important part of Salesforce's value proposition. The new AI-driven product Agentforce, which automates administrative tasks, has received positive early feedback and could significantly boost customer productivity once it becomes generally available in October. Multi-cloud adoption remains a strong growth driver, with 16,000 customers adding new clouds during the quarter. The data cloud sector showed impressive growth, with a 130% year-over-year increase in paying customers. Valuation-wise, Salesforce is currently trading with a free cash flow yield (FCF) of 5%. Maintaining a 20-time FCF multiplier, investors can expect high single-digit to low double-digit returns. To achieve an annualized return of 10% by 2028, Salesforce would need to achieve high single-digit annual revenue growth and roughly $53 billion in revenue with 35% FCF margins, generating about $18.5 billion in FCF. If AI initiatives enable additional growth, this could increase multiples and further enhance returns, making Salesforce an attractive investment opportunity. Salesforce is among the 31 most popular stocks among hedge funds. According to our database, 117 hedge fund portfolios held CRM at the end of the second quarter, compared to 154 in the previous quarter. While we acknowledge the risks and potential of CRM, we believe some AI stocks show more promise and could deliver higher returns more quickly.