Salesforce's beat fails to convince market that software can survive AI

Salesforce reported better-than-expected quarterly results Wednesday evening, but that wasn't enough to convince the market that AI will help rather than hurt its enterprise software business. According to LSEG, revenue in the quarter ended April 30 rose 13.3% year over year to $11.13 billion, beating expectations of $11.05 billion. Adjusted earnings per share came in at $3.87, beating the consensus estimate by 76 cents, according to LSEG data. On a year-over-year basis, adjusted EPS increased by 50%. CRM 1Y Mount Salesforce 1-year return Salesforce shares fell 1% to about $176 in the after-hours session. Shares are down nearly 33% year-to-date and are about $12 above their 52-week low close of $164.96. As a result, Salesforce is doing its best to signal to the market that this year's selloff is unwarranted and that shares trading at less than 14 times earnings do not appropriately reflect the long-term value of the business. But investors are hesitant to jump in until the company delivers more meaningful revenue growth along with expanding margins. Providing some hope, management reiterated its expectations that revenue growth will accelerate again in the second half of this fiscal year. The better-than-expected quarterly result, along with the promise of momentum in the near future, may explain why after-hours action this earnings cycle hasn't been as bad as some other software stocks. Agentforce, the company's major new AI-powered platform, broke a record by closing 98 deals in the quarter, the company said. Agentforce Annual Recurring Revenue (ARR) is now $1.2 billion, up 205% year over year from $800 million in the fourth quarter. During the call, CEO Marc Benioff listed LVMH, Chobani, and the U.S. Air Force as organizations signing up for Agentforce. When combined with the company's cloud unit, Data 360, ARR reached $3.4 billion, up 200% from the previous year. While the Agentforce platform is showing promising momentum, the legacy side of Salesforce has stagnated, and missing remaining performance obligation (RPO) and current remaining performance obligation (cRPO) doesn't help the narrative. cRPO, which measures contracted revenue expected to occur over the next 12 months, was up 13% year over year in constant currency. Meanwhile, RPO increased by 11% year-on-year. Margin performance this quarter was better than expected. Both GAAP and non-GAAP margins improved year over year and outperformed Street expectations, resulting in a large decline in earnings. However, the market may not give the company full credit for margin performance as the full-year GAAP outlook has been adjusted while the non-GAAP outlook remains unchanged. While stocks fell below $200 due to concerns that artificial intelligence could replace traditional software as companies developed their own CRM tools, management aggressively stepped up share buybacks, even issuing debt to finance the buybacks. In March, the company launched a $25 billion accelerated share repurchase program, the largest in ASR history. The buyback currently helps EPS by reducing the number of shares. Time will tell whether this is a good use of cash in the long run. The day ASR launched, the stock was trading at $198, and unfortunately it's currently below $180 because management failed to convince shareholders that AI is a friend and not a threat. Wall Street doesn't want to give CEO Marc Benioff credit for what Salesforce does. It still looks like a broken company, not a disruptive one. Salesforce repurchased a total of $27.1 billion worth of shares this quarter. At our May Monthly Meeting on Wednesday, Jim Cramer made clear that stocks that do not meet our high standards will remain in the portfolio for a short time. We like to keep about 30 names in our portfolio and don't want a troubled stock to stand in the way of a better opportunity. This result was not enough to change our rating in either direction: We maintain our 2 points and $215 price target. Why we have it Salesforce is a leading enterprise software company that helps employees communicate more effectively internally and with customers. Concerns about AI disruption have severely impacted enterprise software, but Salesforce is still a must-have platform for companies. Salesforce's answer to artificial intelligence, called Agentforce, helps companies automate tasks across their teams and organizations. Competitors: SAP, Microsoft, HubSpot Last acquired: March 5, 2025 Started: 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 small miss compared to the consensus estimate of $11.35 billion. Adjusted EPS of $3.25 to $3.27 per share is a penny better at the midpoint of the Street's $3.25 estimate. 13% year-over-year cRPO growth at constant currency. The FactSet consensus estimate called for growth of about 11.8%. For full fiscal 2027, Salesforce expects: revenue between $45.9 billion and $46.2 billion; This is below the FactSet consensus estimate of $46.1 billion, at the midpoint of $46.05 billion. Salesforce only raised its full-year outlook by $100 million at the low end of the range. Revenue guidance represents 10%-11% year-over-year growth in constant currency. GAAP margin outlook was reduced from 20.9% to 20.6%, while non-GAAP margin outlook remained unchanged at 34.3%. Both were below the consensus estimate of 21% and 34.4%, respectively. Adjusted EPS increased from $13.11 to $13.19 to a range of $14.06 to $14.12. The new midpoint of $14.09 is well above the Street's estimate of $13.23. GAAP EPS was increased from $7.85 to $7.93 to a range of $7.93 to $7.99. This is in line with FactSet's consensus estimate of $7.96. Free cash flow is expected to increase 4% to 5%, up from the previous expectation of 9% to 10% growth. The change comes as the company issued $25 billion in debt to finance an accelerated share buyback. (Jim Cramer's Charitable Trust is a long CRM. See here for a full 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. 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