Salesforce issues $25 billion in debt to buy back stock. Should we be concerned?
Marc Benioff, CEO of Salesforce Inc., speaks at the 2025 Dreamforce conference on Tuesday, October 14, 2025 in San Francisco, California, USA.
Michael Short | Bloomberg | Getty Images
Salesforce announced this week that it is taking the first steps of its $25 billion debt-fueled accelerated share repurchase plan. That’s half of the larger $50 billion buyback authority approved in February.
Increasing debt to buy back stock is a move that deserves scrutiny.
After all, equity comes with neither financial obligations nor the consequences of lending. If a company misses a stock dividend, it doesn’t look good and the stock takes a hit. However, there are no legal consequences or lawsuits to be filed. If a company cannot pay its debt, it will face legal problems and demands from bondholders.
We know why Salesforce wants to buy back shares — management believes last month’s brutal sell-off over fears of AI disruption has made its share price attractive — because, as CEO Marc Benioff said in Monday’s press release: “We are very confident in the future of Salesforce.” (Salesforce insiders are also buying. Board member and Williams-Sonoma CEO Laura Alber bought nearly $500,000 worth of Salesforce stock on Thursday, as did David Kirk, a director and former chief scientist. NvidiaHe bought nearly $500,000 worth of Salesforce stock on Wednesday.)
So why is Salesforce lending money to buy back shares? Part of this may be because Benioff and company want to conserve cash. But essentially it comes down to the cost of debt versus the cost of equity. CNBC Investment Club Reporter Paulina Likos and I briefly touched on this concept in a recent video on discounted cash flow valuation modelling. While the video focused more on terminal value, we did cover the concept of discounted rate, or the required rate of return that an investor demands for investing in a particular security. We noted that individual investors can and should use the rate they deem appropriate based on the risk they consider.
The ‘Shark Tank’ analogy for the cost of capital
These things can get pretty complicated. In an oversimplified “Shark Tank” analogy, imagine you are starting a business. You need to figure out how to finance it. You can give the sharks a percentage of your business (equity) or take out a bank loan (which comes with the obligation to repay the principal plus interest). This decision depends on the cost of each – the interest rate of the loan (cost of debt) versus the amount you think the equity stake can produce (this is your “cost of equity” since you are giving up equity). Whichever route you go, the end goal is to finance your business at the lowest possible total cost of capital.
But for companies on Wall Street, the discount rate is usually their “weighted average cost of capital,” or WACC. WACC is the weighted average of the cost of debt and equity required to finance the company.
Weighted average cost of capital
Shred:
- V = Total value is equity plus debt
- to = Market value of equity capital (HOUSE is the weight of equity capital in the capital structure)
- D. = Market value of debt (D/V is the weight of debt in the capital structure)
- CE = Cost of equity capital
- CD = Cost of debt
- T = Corporate tax rate
Don’t worry too much about how to calculate this. The real goal is to look at what goes into the equation to better understand how companies think about achieving the most efficient capital structure, i.e. the lowest possible WACC. The lower the discount rate (in this case WACC), the higher the present value of future earnings and cash flows. Takeaway: Any increase in the weight of the lower priced asset (equity or debt) can reduce the WACC. That is, to the point where investors become concerned about leverage on the balance sheet and begin to express those concerns by demanding higher returns on equity, lowering shares, and raising the company’s cost of equity.
cost of debt
So which is lower for Salesforce: the cost of equity or the cost of debt? Calculating the debt part is easy enough because Salesforce told us how much yield they paid on the bonds. This is what is shown in the slide below.
Going back to the WACC equation from earlier, the cost of debt is multiplied by one minus the tax rate, giving companies a tax deduction on debt interest payments. So the real cost of debt is lower than what is shown on the slide. Don’t worry about how low it is, just know this: According to the WACC calculation, the real cost of debt is the return seen above multiplied by a number less than 1. So, at the highest level, the pre-tax cost of Salesforce based on notes maturing in 2066 is about 6.7%, and the after-tax cost of debt is somewhere below that – it could be closer to about 5.3% assuming a 22% corporate tax rate.
cost of equity
Now that we know how much the most expensive part of this debt increase will cost Salesforce, let’s figure out what the cost of equity is. To do this, the capital asset pricing model (CAPM) is used. Here is the calculation:
Shred:
- R.F. = Risk-free rate — a frequently used indicator is the 10-year Treasury yield
- β = Beta — a measure of systemic risk is a stock’s volatility versus an index
- rm = Expected market return (rm – R.F. is the calculation of the market risk premium)
There is an equation to find beta; however, most data providers already have this feature. Instead of calculating Salesforce’s beta input ourselves, we got it from FactSet. So, with Salesforce’s three-year beta of 1.21, a 10-year Treasury yield of 4.24% (as of this writing), and a conservative expectation market return of 8%, Salesforce’s cost of equity is around 9.27%. Since the cost of equity is much higher than the cost of debt, replacing equity with debt reduces Salesforce’s weighted average cost of capital.
In conclusion
It’s understandable to question Salesforce’s debt-driven share buyback because it adds new financial liabilities at a time when the stock says its long-term prospects are in trouble due to AI. But from a management perspective that is clearly not concerned with long-term fundamentals, improving the company’s capital structure by lowering the overall cost of capital is a smart move. Not only does a lower WACC help increase present value by lowering the discount rate in Wall Street’s financial models, it can also open up more investment opportunities because the barrier to achieving positive returns is lower.
The move may make sense, but only time will tell whether it is wise or not. Salesforce is changing its balance sheet option for a lower number of shares, which increases earnings per share. However, this strategy also causes S&P Global’s credit rating to drop due to increased leverage on the balance sheet. This means future debt will be serviced at a higher cost.
It all depends on whether Salesforce can pay off the debt, which probably depends on who is right in the AI debate. If Salesforce is indeed replaced by other Claude-like names (we don’t think that will be the case, but that’s clearly what the market fears), then debt will become harder to service, investors will be even more worried now that the balance sheet is rising and the stock is likely falling; which will result in all of this being not only a waste of money but also a financial backstop. On the other hand, if management is proven right and Salesforce grows and actually leverages AI, then this move will strengthen the company’s capital structure.
While a credit rating downgrade continues to cause problems, if all goes well, this situation can be reversed as management can repay the debt, deleverage the balance sheet and improve overall financial reliability. This move will also increase the reward if the bulls are proven right, by retiring the shares that this debt will buy back, ensuring that shareholders will all own slightly more in the company than they previously had.
(Jim Cramer’s Charitable Trust is the long CRM. See Here For a complete list of stocks.)
When you subscribe 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 trading alert before buying or selling a stock in his charitable foundation’s portfolio. If Jim talked about a stock on CNBC TV, he would wait 72 hours after issuing the trading alert before executing the trade.
THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICYWITH DISCLAIMER. NO CIVIL OBLIGATIONS OR DUTIES EXIST OR SHALL BE RESULTING FROM YOUR RECEIVING ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULT OR PROFIT CAN BE GUARANTEED.
