Salesforce’s struggling stock needs earnings to show AI progress

(Bloomberg/Ryan Vlastelica) — After months of pain, Salesforce Inc. investors will be scrutinizing the software maker’s upcoming earnings for signs it will be a winner in the artificial intelligence boom — or one of its most high-profile victims.

Salesforce shares are down 23% this year, putting them among the 30 worst-performing stocks in the S&P 500 Index. It’s been a swift reversal for what had been a bright light in the market, soaring over 150% in 2023 and 2024 combined. The plunge has been particularly dramatic in light of the strong showings by software giants like Microsoft Corp., Oracle Corp., and Palantir Technologies Inc., all of whom are considered to be stronger in AI.

While Salesforce, which makes customer relationship management software, has its own AI products, concerns about its long-term trajectory mean the shares may languish even if the company posts strong earnings when it reports after the bell on Wednesday. The stock rose 1.4% Wednesday morning.

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“I’m not expecting a major AI contribution to Salesforce over the next several quarters, and in the meantime there are a lot of concerns that AI can disrupt and replace the legacy software names,” said Jake Seltz, who manages the Allspring LT Large Growth ETF, which owns Salesforce shares. “I’m optimistic it will eventually be a winner, but it may take a couple years, and right now there’s more interest in the companies that are already benefiting.”

Salesforce is expected to post revenue growth of nearly 9% from a year ago in its fiscal second quarter, with a 23% increase in net earnings. While that would represent its fastest sales expansion in more than a year, it would still be the fifth straight quarter below 10%, something that hadn’t happened for almost two decades. The company’s annual revenue isn’t expected to grow at a double-digit pace until fiscal 2029.

Salesforce’s previous earnings report showed its Agentforce AI platform gaining traction. Similarly, the company considers its $8 billion acquisition of data-management software company Informatica Inc. a key piece of its AI strategy. However, investors remain unsure whether AI will be a tailwind or a headwind for the stock.

The company isn’t alone in its struggles. Other long-time software leaders like Adobe Inc. have also been hobbled this year by fears that their growth could be usurped by AI-native competitors.

The software industry faces three threats from AI, according to KeyBanc Capital Markets, and Salesforce is exposed to two of them: AI-written coding that can generate features and applications, and AI shrinking workforces and thereby reducing demand for seat-based business models like Salesforce’s.

“There was a lot of fanfare about Agentforce, but the revenue numbers haven’t been amazing, especially relative to a company of this size, and that’s been disappointing,” said Rishi Jaluria, managing director of software equity research at RBC Capital Markets, who downgraded the shares earlier this year after being a long-time Salesforce bull.

“There are real questions about how mature the tech is and whether it can deliver on the promise, especially since we will only see more AI competitors going forward,” Jaluria added. “Unless Agentforce becomes a must-have, I worry growth will continue to slow.”

Potential Bargain

Of course, given the plunge in Salesforce’s stock price this year, low expectations heading into this earnings report make it easier for the company to surprise to the upside. The analysts covering the shares have an average price target of about $336 over the next 12 months, indicating upside of more than 30%, according to data compiled by Bloomberg.

The company’s stock market valuation also suggests room to run. Salesforce shares trade at just 21 times blended forward earnings, not far from an all-time low and a fraction of their long-term average.

In a measure of confidence, the hedge fund Starboard Value raised its stake in Salesforce by more than 400,000 shares as of June 30, according to Bloomberg’s analysis of Starboard’s 13F filing.

Still, the company’s prospects likely come down to AI, making a cheap valuation beside the point in many ways. For example, investors have largely looked past Palantir’s chart-topping valuation because of its strong position in AI. What is Salesforce worth if it isn’t a major player in this boom?

“So long as we have limited visibility on AI growth, the multiple will continue to come down,” said RBC’s Jaluria. “Even though it isn’t expensive, if growth continues to slow, its hard to stick my neck out and say buy now.”

Tech Chart of the Day

Nvidia Corp. closed below a key technical level for the first time since May as investors continue to rotate out of the leading maker of artificial intelligence chips. The stock fell 2% to $170.74 on Tuesday, a fourth straight negative session that took it below its 50-day moving average of $171.06. Breaking under this closely watched level is seen as a negative sign of near-term momentum trends.

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Earnings Due Wednesday

Earnings Postmarket:

Hewlett Packard Enterprise Co. (HPE US)
Methode Electronics Inc. (MEI US)
PagerDuty Inc. (PD US)
Salesforce Inc. (CRM US)

–With assistance from Subrat Patnaik and David Watkins.

(Updates to market open.)

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