Strong Q3 for Salesforce, Prompting Questions on Stock Potential; Could It Break Through $440?
Salesforce, a prominent cloud-based software solutions provider, has encountered a rocky start to 2025, with the company's stock dipping 3.3% yesterday and falling 21.1% year-to-date. Despite reporting robust financial results, these numbers have raised concerns among investors regarding Salesforce's near-term prospects. However, Wall Street remains optimistic about the stock, ascribing a "Strong Buy" rating to it and anticipating it to surge by up to 65% from its current level.
Known for its customer relationship management platform, Salesforce assists businesses in managing and automating customer interactions and other services via a unified cloud-based system. Utilizing a subscription-based model, the company charges businesses recurring fees to access its Software-as-a-Service (SaaS) offerings.
In the first quarter of fiscal year 2026, Salesforce recorded revenue of $9.8 billion, representing an 8% increase year-over-year, and adjusted earnings of $2.58 per share, surpassing analyst expectations. Subscription and support revenue grew by 8% year on year to $9.3 billion. The current remaining performance obligation (CRPO) increased by 12% to $29.6 billion, signaling a promising revenue outlook for the future.
Salesforce has recently invested in artificial intelligence (AI) to augment its product offerings. The company launched its AI platform, Agentforce, in September 2024, with the aim of automating customer service and sales processes. Since its launch, Agentforce has closed over 8,000 deals, with half of them being paid engagements. This platform has contributed to the growth of Data Cloud and AI annual recurring revenue, which now exceed $1 billion, representing a 120% year-over-year increase.
While Agentforce has shown promise, analysts are cautious, viewing it as a "show-me story" that requires further validation as a catalyst for long-term growth. Citi lowered its price target for CRM to $295 from $320, issuing a "Neutral" rating. Morgan Stanley analysts share the same sentiments, expressing concern over macroeconomic headwinds affecting Salesforce despite strong financial results.
To further bolster its data capabilities, Salesforce announced plans to acquire data management company Informatica for approximately $8 billion. This acquisition aims to strengthen Salesforce's AI capabilities by providing cleaner and more integrated data to Agentforce. However, some analysts are apprehensive about Salesforce's reliance on acquisitions rather than organic innovation.
Salesforce ended the quarter with a cash reserve of $17.4 billion. In the quarter, the company generated significant free cash flow (FCF) of $6.3 billion, utilizing $402 billion for dividends and $2.7 billion for share repurchases. Salesforce also upgraded its full-year revenue guidance to between $41.0 billion and $41.3 billion, a 8% to 9% increase over fiscal 2025. Adjusted EPS is now expected to range between $11.27 and $11.33, reflecting confidence in long-term growth.
Analysts covering CRM stock anticipate revenue to grow by 8.6% in fiscal 2026, followed by a 10.8% increase in earnings. Additionally, revenue and earnings are projected to increase by 8.9% and 11.9% in fiscal 2027, respectively. Given its current valuation of 23 times forward earnings, some analysts view CRM as an attractive AI stock to invest in at present. Despite short-term challenges, Salesforce's strategic focus on AI integration, data management, and expanding go-to-market capacity put it in a favorable position to capitalize on the surge in demand for enterprise software solutions.
Salesforce's first-quarter results underscore its resilience with a strong financial performance and strategic investments in AI, poising the company for long-term success. Although short-term challenges have affected investor sentiment, the company's long-term prospects remain promising. Salesforce could stage a comeback, potentially reaching its high target price of $440, if it can successfully integrate its acquisitions and deliver on its AI initiatives.
- Salesforce's strategic investment in artificial intelligence, as demonstrated by the launch of its AI platform, Agentforce, and plans to acquire data management company Informatica, positions the company as an attractive AI stock for investors.
- Despite the recent concerns among investors regarding Salesforce's short-term prospects, the company's focus on integrating AI technology, data management, and expanding go-to-market capacity places it in a favorable position to capitalize on the surge in demand for enterprise software solutions, potentially reaching its high target price of $440.
