Salesforce Stock: I Warned About AI FOMO — But I’m Buying Now (Upgrade) (NYSE:CRM)

My warning about Salesforce stock is over

Salesforce, Inc. has warned. (New York Stock Exchange: Customer Relationship Management) Investors should be cautious about chasing further upside in CRM as I assess optimism has become too frothy. In updating my CRM inventory In December 2023, I pointed out that although CRM’s valuation is still relatively attractive, the risk/reward is no longer to my liking. As a result, I downgraded my CRM to reflect my increased caution. CRM’s buying momentum initially mystified me by allowing the stock to rally towards its February 2024 highs. However, the moment of reckoning finally came then Salesforce’s first fiscal quarter earnings release last week. Accordingly, CRM has suffered a historic sell-off like Salesforce reported “slowest quarterly sales growth in its history, with revenue expected to rise as much as 8% to $9.25 billion in the period ending July.”

in spite of The notable decline in CRM stock as it fell into a bear market also reminded investors to take advantage of its next pullback to add exposure. Over the past week, I have observed relatively good buying sentiment on CRM shares above the $212 level. Furthermore, CRM has already recovered above the $240 level as of the June 6 close. While it is still too early to confirm a decisive bullish reversal from a bear market pullback, I assess an increasingly attractive opportunity for investors to turn bullish at current levels.

Salesforce AI Monetization Disappointment

Before then, let’s revisit the highlights of the already well-covered earnings update and find out if the recent pessimism is overdone. Besides reporting mixed earnings in the first quarter, Salesforce’s guidance for the second quarter was disappointing, as previously highlighted. However, Salesforce maintained its full-year guidance range, which could raise execution risks in the second half. Salesforce management responded to growing concerns about not lowering its full-year guidance in the CRM’s first-quarter earnings call. Salesforce announced that it has the confidence to beat “measured purchasing behavior” over the past two years. Additionally, Salesforce noted that its revised go-to-market changes impacted near-term performance in the first quarter. However, the changes should provide a stronger foundation for Salesforce “to realize productivity gains in subsequent quarters.” Hence, Salesforce is confident that it will facilitate “faster execution in Q2, Q3 and Q4.”

Despite its tepid first-quarter guidance, Salesforce assured investors that it should continue to gain operating leverage, maintaining its focus and discipline on driving profitable growth. As a result, CRM guided for a full-year adjusted operating margin of 32.5%, a significant improvement from the FY24 benchmark of 30.5%.

However, I have always believed that the market is always right (but analysts can be wrong). The market was unconvinced even though Salesforce management attempted to allay investor concerns with a more aggressive profitability outlook. The sharp sell-off (down nearly 35% from their February 2024 highs) sent CRM shares tumbling into a deep bear market before recovering over the past week. As a result, I believe intense profit-taking is likely to occur, as previous investors take the opportunity to quickly reallocate away from the leading SaaS company. Pessimism was felt across the SaaS industry as the iShares Expanded Tech-Software Sector ETF (IGV) fell to levels last seen in November 2023, giving up its gains since the start of the year.

What happened? Didn’t we get a strong performance from Microsoft ( MSFT ) earlier in April, as the Redmond-headquartered company reported strong momentum for Azure cloud growth?

Salesforce is not Microsoft

wait a moment. Microsoft is clearly not just a SaaS player anymore. It is a leading cloud computing company and Tier 1 integrator. It even ventured into the hardware space with custom data center chips from Microsoft, looking to integrate its value chain further. As a result, Microsoft has an established cloud computing ecosystem with significant IaaS and PaaS capabilities, as described above. In addition, it also has large leading SaaS units in systems and application SaaS domains that enable a more synergistic and better integrated platform compared to pure-play SaaS companies. As a result, I believe it has allowed Satya Nadella-led Microsoft to integrate its AI offerings more aggressively, as Microsoft has benefited from monetizing AI across the group.

While Salesforce is making strong progress with its data cloud and multi-cloud offerings to unify customer data, CRM does not have the advantage of MSFT’s robust ecosystem to more effectively monetize AI in the near term. As a result, I’m not surprised that Salesforce CEO Marc Benioff noted that “generative AI features within Salesforce applications may not significantly impact revenue until 2025 or 2026.” Despite this, Salesforce is confident in the enterprise potential of its platform in the long term, given the massive amount of data it manages. According to the company, Salesforce “manages 250 petabytes of customer data and metadata, making it one of the largest repositories globally.”

Benioff emphasized his belief that LLM (open source or proprietary) degrees will become increasingly commoditized. “Not everyone will survive,” he stressed. Therefore, the key likely lies in orchestrating an effective system for deploying the right AI assistants on high-quality data to achieve the desired results and provide a sustainable competitive advantage. With Salesforce’s access to a trove of high-quality enterprise data, I believe the company is well-positioned to help its enterprise customers succeed. However, the near-term experience of AI solutions suggests that monetization may take longer, leading to a more advanced growth trend for even leading players like Salesforce. This suggests that investors should be patient and avoid chasing unsustainable upside increases like the ones we observed in December 2023 and early 2024.

Is CRM stock a buy, sell or hold?

CRM is not rated at a discount even after huge sales (“F” rating). Therefore, Salesforce must remain focused on outperforming its FY2025 forecast as Wall Street grows concerned about the possibility of CRM missing its full-year forecast.

However, Salesforce is an enterprise SaaS giant with a best-in-class profitability rating of “A+,” justifying its fundamentally strong business model. Selling intensity has also slowed, as I noted earlier. CRM’s ‘C+’ Momentum grade supports my analysis, indicating potential for consolidation at current levels.

Furthermore, the adjusted PEG ratio fell to 1.23, nearly 40% below the technology sector average. Hence, I think the market seems to have become overly pessimistic about Salesforce’s growth thesis. Although the market is cautious in the near term, it has found an attractive opportunity for long-term investors to take advantage of the valuation divergence and buy more shares of the leading cloud SaaS company.

Rating: Upgrade to buy.

IMPORTANT NOTE: Investors are reminded to conduct due diligence and not to rely on the information provided as financial advice. Consider this article to complement your required research. Please always apply independent thinking. Note that the classification is not intended to specify a specific entry/exit time at the time of writing unless otherwise stated.

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