Salesforce's AI story: Why the market isn't buying it

Core Viewpoint - Salesforce, initially seen as a growth leader in AI, is now facing valuation challenges as investor sentiment shifts towards skepticism about AI's impact on the tech sector [1][6]. Financial Performance - Salesforce shares have declined nearly 30% year-to-date, trading close to the lower end of their 52-week range, despite expectations of a new era of double-digit growth [2]. - Revenue growth is projected to fall below 10% in the coming years, a significant drop from the previous annual growth rate of around 20% [2]. - The company's forward P/E ratio is approximately 18, with a trading multiple of about five times forward sales, indicating a substantial decrease compared to many large software peers [2]. Market Perception - The market currently views Salesforce as a modest performer rather than a leader in AI innovation, despite the company's efforts to promote its AI capabilities [3]. - Investors are evaluating the potential impact of Salesforce's AI initiatives, such as Agentforce and Data Cloud, which have a disclosed annual recurring revenue (ARR) run-rate of $1.2 billion [5]. Upcoming Earnings Expectations - Salesforce is set to report its latest earnings, with expectations of revenue around $10.27 billion and non-GAAP earnings of approximately $2.86 per share, reflecting year-over-year increases of about 9% and 18% respectively [4]. - The focus for Salesforce is not just on meeting these expectations but on demonstrating a transformative narrative that showcases the effectiveness of its AI initiatives [4]. AI Narrative vs. Market Reality - There is a disconnect between Salesforce's ambitious AI revenue goals, projected to exceed $60 billion annually by the end of the decade, and the current market valuation, which reflects a lack of confidence in achieving these targets [6]. - The perception of AI as a potential bubble is leading to a decline in Salesforce's stock value, positioning it among companies viewed as "AI losers" [6]. - Concerns persist that AI advancements could negatively impact software pricing, shift budgets towards infrastructure, or facilitate new entrants in the market, further challenging Salesforce's position [6].