Salesforce Shares Plunge on Weak Forecast

The year continues to be challenging for Salesforce (CRM).

Shares of the customer relationship management giant tumbled 8% in after-hours trading Wednesday following a tepid revenue forecast accompanying its fiscal second-quarter earnings report. This drop exacerbates an already concerning trend, pushing Salesforce’s year-to-date slump to 28% – a stark contrast to the performance of many of its large-cap tech peers.

While Salesforce reported a commendable 10% increase in revenue for the second quarter, reaching $10.24 billion and surpassing analysts’ estimates of $10.14 billion, the concerning element lies in its forward guidance. The company projects revenue between $10.24 billion and $10.29 billion for the fiscal third quarter, falling short of the $10.29 billion consensus among analysts, according to LSEG data.

Despite consistent rhetoric surrounding investments in artificial intelligence (AI) and the continuous evolution of its Software-as-a-Service (SaaS) offerings, Salesforce has thus far failed to capitalize on the AI boom in the same manner as its counterparts, particularly those specializing in cloud infrastructure. The muted response begs the question: Is Salesforce’s AI strategy not resonating with the market, or are the benefits simply not materializing at a pace that satisfies investors?

Adding to the pressure, a growing unease pervades Wall Street regarding the potential for AI to disrupt and cannibalize significant portions of the software sector. The fear is that AI-driven solutions will increasingly automate tasks currently performed by traditional SaaS applications, ultimately impacting revenue streams for companies like Salesforce.

“While investor sentiment is undeniably anxious regarding the long-term prospects of SaaS, Salesforce’s current performance, while impressive in sheer scale, isn’t sufficient to meaningfully alter the prevailing narrative,” analysts at KeyBanc Capital Markets observed in a recent report. Despite these concerns, KeyBanc maintains a “buy” rating on the stock, suggesting a belief in Salesforce’s long-term potential despite the near-term challenges.

On a conference call with analysts, Robin Washington, Salesforce’s president and chief operating and financial officer, acknowledged ongoing challenges in selling marketing and commerce-related products. This admission suggests a need for strategic adjustments to address evolving market demands and heightened competition in these segments.

The company’s earnings release highlighted the successful closure of over 12,500 deals for Agentforce, its AI-powered customer service automation platform, including 6,000 paid deals. Notably, over 40% of bookings for Agentforce and its data cloud originated from existing customers, signaling potential for upselling and cross-selling within its established client base. The importance of the Data Cloud, in integrating customer data for AI insights, cannot be overstated, yet whether Salesforce is truly maximizing its potential remains a point of contention.

CEO Marc Benioff, known for his characteristic optimism, sought to allay concerns surrounding the AI threat, emphasizing that “we are seeing one of the greatest transformations” within the enterprise software landscape.

“Some of the things people say on social media or elsewhere simply aren’t grounded in customer truth,” Benioff stated, dismissing anxieties surrounding the transformative impact of AI.

Salesforce has maintained its full-year revenue outlook, but has revised its earnings guidance upward, projecting adjusted earnings per share between $11.33 and $11.37 on revenue of $41.1 billion to $41.3 billion. This adjustment suggests that the company is prioritizing profitability amidst slower growth. The key question is whether this strategy will be enough to appease concerned investors.