Salesforce's beat fails to convince the market that software can survive AI
Salesforce on Wednesday evening delivered better-than-expected quarterly results, but it wasn't enough to convince the market that AI will help — not hurt — its enterprise software business. Revenue in the quarter ended April 30 rose 13.3% year over year to $11.13 billion, topping expectations of $11.05 billion, according to LSEG. Adjusted earnings per share totaled $3.87, beating the consensus estimate by 76 cents, LSEG data showed. On a year-over-year basis, adjusted EPS increased 50%. CRM 1Y mountain Salesforce 1-year return Shares of Salesforce dipped 1% in the after-hours session to about $176. Shares are down about 33% year to date and about $12 above its 52-week low close of $164.96. Bottom line Salesforce is doing everything it can to signal to the market that this year's sell-off is unwarranted and shares trading at less than 14 times earnings don't appropriately reflect the long-term value of the business. But investors remain hesitant to step in until the company delivers more meaningful revenue acceleration alongside expanding margins. Offering some hope, management reiterated its expectations that revenue growth will reaccelerate in the second half of this fiscal year. The better-than-expected quarterly result, along with the promise of building momentum in the near future, might explain why the after-hours move isn't as wicked as that of some other software stocks in this earnings cycle. The company's important new AI-powered platform, Agentforce, closed 98 deals in the quarter, a record, the company said. Agentforce Annual Recurring Revenue (ARR) is now at $1.2 billion, up 205% year over year, from $800 million in the fourth quarter. On the call, CEO Marc Benioff listed LVMH, Chobani, and the U.S. Air Force as organizations that have signed up for Agentforce. Combined with Data 360, the company's cloud unit, and ARR is $3.4 billion, up 200% year over year. While the Agentforce platform is showing promising momentum, the legacy side of Salesforce has been sluggish, and the miss on the remaining performance obligation (RPO) and current remaining performance obligation (cRPO) doesn't help the narrative. The cRPO, which measures contracted revenue expected to be realized in the next 12 months, increased 13% year over year in constant currency. Meanwhile, RPO was up 11% year over year. The margin performance was better than expected in the quarter. Both GAAP and Non-GAAP margins improved year over year and outperformed Street expectations, resulting in a big earnings beat. However, the market may not give the company full credit for margin performance, since the full-year GAAP outlook was trimmed while the non-GAAP outlook was left unchanged. With the stock languishing below $200 amid concerns that AI could replace traditional software as companies build their own CRM tools, management aggressively ramped up share repurchases, even issuing debt to fund buybacks. In March, the company launched a $25 billion accelerated share repurchase program, the largest one in ASR history. The buyback is helping EPS right now by shrinking the share count. Time will tell if this was a good use of cash over the long term. The stock traded at $198 on the day the ASR commenced, and unfortunately, it is now below $180 because management has been unable to convince shareholders that AI is a friend rather than a threat. Wall Street simply does not want to give CEO Marc Benioff credit for what Salesforce is doing. It still looks too much like a disrupted company, not a disrupter. In total, Salesforce bought back $27.1 billion worth of stock in the quarter. At our May Monthly Meeting on Wednesday, Jim Cramer made it clear that stocks that don't meet our high standards will have a short leash in the portfolio. We like to keep around 30 names in the portfolio, and we don't want a troubled stock to get in the way of a better opportunity. This result wasn't enough to change our rating, in either direction: We are maintaining our 2 rating and $215 price target. Why we own it Salesforce is a leading enterprise software company that helps employees communicate more effectively internally and with customers. AI disruption concerns have hit enterprise software hard, but Salesforce is still a must-have platform for companies. Salesforce's answer to AI, which it calls Agentforce, helps companies automate tasks across their teams and organizations. Competitors : SAP , Microsoft , HubSpot Most recent buy : March 5, 2025 Initiation : June 15, 2018 Guidance For Salesforce's second quarter of fiscal 2027, management expects: Revenue in the range of $11.27 billion to $11.35 billion. This midpoint of $11.31 billion was a tiny miss versus the consensus estimate of $11.35 billion. Adjusted EPS in the range of $3.25 to $3.27 a share, which is a penny better at the midpoint to the Street's $3.25 estimate. cRPO growth of 13% year over year in constant currency. The FactSet consensus estimate called for growth of about 11.8%. For the full year fiscal 2027, Salesforce expects: Revenue of $45.9 billion to $46.2 billion, which at the midpoint of $46.05 billion is below the FactSet consensus estimate of $46.1 billion. Salesforce only raised its full-year outlook by $100 million at the low end of the range. The revenue guide represents year-over-year growth of 10%-11% in constant currency. GAAP margin outlook was lowered to 20.6% from 20.9%, while the non-GAAP margin outlook was unchanged at 34.3%. Both were below the consensus estimate of 21% and 34.4%, respectively. Adjusted EPS was raised to the range of $14.06 to $14.12 from $13.11 to $13.19. The new midpoint of $14.09 is well above the Street's $13.23 estimate. GAAP EPS was raised to the range of $7.93 to $7.99 from $7.85 to $7.93. That's in line with the FactSet consensus estimate of $7.96. Free cash flow is expected to increase 4% to 5%, down from its prior expectation of 9% to 10% growth. The change resulted from the company issuing $25 billion in debt to fund its accelerated share repurchase. (Jim Cramer's Charitable Trust is long CRM. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. 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