Salesforce Earnings: Investors Look for Growth Acceleration and AI Advancements

There was a moment, during the pandemic-fueled growth days of 2020, when Salesforce (CRM) surpassed Oracle (ORCL) by market cap. Marc Benioff had, at least momentarily, toppled his mentor, Larry Ellison.

That moment, however, is now firmly in the rearview mirror.

Salesforce’s stock is down a stark 25% year-to-date, making it the worst performer among large-cap tech companies and the second-worst in the Dow Jones Industrial Average, edging out only UnitedHealth (UNH). Oracle, meanwhile, has surged 34%, significantly outpacing both its peers and the major indexes.

The valuation chasm between the two companies, once near parity, has widened to approximately $400 billion. Oracle currently boasts a market capitalization of $630 billion, while Salesforce has receded to $239 billion. This shift is reflected in personal fortunes as well: Ellison now occupies the second spot on the Bloomberg Billionaires Index, with a net worth of $278 billion, trailing only Elon Musk. Benioff, in contrast, sits at 318th place with a comparatively modest $10.4 billion.

Investors are keenly awaiting Salesforce’s quarterly results, due after the market close on Wednesday, for insights into Benioff’s strategy to navigate these choppy waters.

Sales growth has been stuck in single-digit territory for four consecutive quarters, a consequence of market saturation in the core customer relationship management (CRM) software space. Analysts anticipate this trend to continue, projecting revenue growth of 8.7% to $10.1 billion, according to LSEG.

During the April period, around a quarter of Salesforce’s $9.3 billion in subscription and support revenue was generated from customer service-related products, its largest single category. The company charges clients for its Service Cloud offering based on the number of agents utilizing the software.

However, the meteoric rise of artificial intelligence presents a potential disruption. Some analysts foresee increased automation handling a greater proportion of inquiries, posing a tangible risk to Salesforce’s established revenue model.

Benioff recognizes this challenge. He acknowledged in June that AI is already handling approximately 30% to 50% of the company’s workload. This is a key driver behind Salesforce’s decision to reportedly cut 1,000 jobs earlier this year.

On the customer-facing side, Salesforce is now marketing Agentforce, an AI-powered system designed to automate customer support requests. Since its launch in October, Agentforce has generated $100 million in annualized revenue, according to Benioff during a May conference call with analysts.

“It’s not significant enough to move the needle on this business, given the scale,” said Michael Turrin, a Wells Fargo analyst with a “hold” recommendation on Salesforce shares, suggesting that Agentforce’s impact is still relatively limited.

The aspiration is that customers will ultimately spend more on Agentforce than on the traditional Service Cloud, explained Turrin, leading to a higher average revenue per user.

Oracle, conversely, is positioned as an early beneficiary of the AI boom. Primarily recognized for its database software utilized by large corporations and government entities, Oracle has secured significant cloud infrastructure commitments from OpenAI and Elon Musk’s xAI.

Agentforce could represent Salesforce’s opportunity to capitalize on the burgeoning AI market, assuming it gains significant market traction.

“I think there’s been a lot of frustration with Salesforce’s share performance, so I think we’re at a point where investors are trying to figure out if there’s an opportunity for a bit of a rebound here,” Turrin concluded, highlighting the current uncertainty surrounding the company’s future trajectory.

Investors are also paying close attention to improvements in current remaining performance obligations (CRPO) at constant currency, a key metric representing anticipated revenue over the next year. In May, operating chief Robin Washington projected a 9% increase for the August quarter.

“The longer that metric stays above 10%, the more confident investors are that this business can sustain a 10% growth profile for at least the next year,” Turrin explained, underscoring the importance of achieving and maintaining a double-digit growth rate for CRPO.

Analysts anticipate a slight uptick in revenue growth for the fiscal third quarter, with consensus estimates currently hovering around 9%, according to LSEG.

Salesforce declined to provide further comment on the matter.

Growth could also be fueled by external acquisitions. In May, Salesforce announced its agreement to acquire data management company Informatica (INFA) for $8 billion. This marks Salesforce’s largest deal since its $27.1 billion acquisition of Slack in 2021. In the intervening period, Salesforce had not spent more than $2.5 billion on M&A, a strategy that had been a significant growth driver in previous years.

In late 2022, activist investors began targeting Salesforce, expressing dissatisfaction with Benioff’s high-cost acquisitions, the company’s struggling stock price, and its expanding workforce. These activists advocated for a more balanced approach between sales and profitability, prompting Salesforce to accelerate its margin expansion plans.

Starboard Value, a key player in the activist campaign, has recently doubled down on its investment. In the second quarter, the firm, which initially purchased Salesforce stock in 2022, increased its holdings by 47%, according to an SEC filing. In October 2024, Starboard’s Jeff Smith acknowledged Salesforce’s improved profitability but maintained that “there’s a lot more to go.”

Vulcan Value Partners, another Salesforce shareholder, has expressed confidence in the company’s current strategy. After initially investing in 2020, Vulcan added 345,000 shares in the second quarter, bringing its total holdings to $300 million.

“The thing that we focus on is the value per share of the business,” said Stephen Simmons, a portfolio manager at the firm. “That is continuing to grow. There’s nothing we’re seeing that’s saying this company is going away anytime soon,” signaling a long-term investment perspective.

Analysts predict earnings per share to increase to $2.78 for the most recent quarter, up from $2.56 a year ago, as per LSEG data.

Vulcan exited its position in Oracle shares in 2020, consequently missing out on the subsequent rally. Simmons stated that they would consider reinvesting if the stock experiences a period of undervaluation.

“Funny how things go around and come around,” Simmons remarked. “Benioff starts Salesforce as a cloud-native enterprise company, and Larry’s over at Oracle trying to transition his on-prem customers to the cloud,” highlighting the ironic reversal of roles as the tech giants adapt to the evolving market landscape.