In early December 2004, Salesforce (CRM -0.96%) was trading at a split-adjusted price of under $4. After the stock climbed following its most recent strong earnings report to over $360, the stock is now up more than 90 times in the past 20 years as of this writing. Looking at more recent returns, the stock is up about 35% year to date.
Salesforce is the granddaddy of software-as-as-service (SaaS) companies, helping revolutionize the software industry. Today, it is looking toward artificial intelligence (AI) as its next big growth driver.
Let's take a closer look at its most recent results to see if the stock's strong momentum can continue.
AI opportunity ahead
While Salesforce has been one of the best-performing software companies of the past two decades, it has also matured, and its growth has slowed. It is looking for its AI-powered chatbot platform, Agentforce, to help drive growth moving forward.
For its fiscal third quarter, Salesforce's revenue rose 8% year over year to $9.44 billion, which was well ahead of its prior guidance for revenue of between $9.31 billion and $9.36 billion. Subscription and support revenue jumped by 9% to $8.88 billion.
While its core business was solid, with growth similar to Q2, growth from prior acquisitions saw a meaningful deceleration in the quarter. Mulesoft revenue only edged up 1%, while Tableau increased 5% and Slack revenue jumped 8%. By comparison, Mulesoft revenue grew 27% in Q1 and 13% in Q4; Tableau's revenue increased by 21% in Q1 and 11% in Q2; and Slack revenue climbed 17% in both Q1 and Q2.
Image source: Getty Images.
The one big bright spot in the quarter, though, was Agentforce, which launched in October. The company closed 200 deals for the autonomous AI agents in the quarter despite the recent launch, and the company said it was seeing incredible adoption rates. It also noted that it has a pipeline of thousands of potential deals for Agentforce.
Notably, Agentforce is a usage-based product that costs $2 per conversation. This model could allow the company to see huge upside as more customers adopt the product and overall usage increases over time with its customers.
Salesforce's current remaining-performance obligations (cRPOs) rose 10% year over year to $26.4 billion. This is a common metric used by SaaS companies to help measure future revenue growth over the next year, although eventually, Agentforce's consumption model could see this metric as less indicative of overall future growth.
Looking ahead, Salesforce increased its revenue guidance for the full year and lowered its EPS forecast. It now expects revenue of between $37.8 billion to $38.0 billion, representing growth of 8% to 9%, with adjusted EPS of between $9.98 to $10.03.
Here is a chart of Salesforce's guidance changes throughout the year.
| Original Guidance (February) | May Guidance | August Guidance | Current Guidance | |
|---|---|---|---|---|
| Revenue | $37.7 billion and $38 billion | $37.7 billion and $38 billion | $37.7 billion and $38 billion | $37.8 billion to $38.0 billion |
| Revenue Growth | 9% |
8% to 9%
|
8% to 9% | 8% to 9% |
| Adjusted EPS | $9.68 to $9.76 | $9.86 to $9.94 | $10.03 to $10.11 | $9.98 to $10.03 |
For Q4, the company is projecting revenue of between $9.90 billion and $10.10 billion, representing growth of 7% to 9%. It is looking for an adjusted EPS of between $2.57 to $2.62.
Can Salesforce's momentum continue?
From a valuation perspective, Salesforce looks like it trades at a reasonable valuation based on its current growth. It has a forward price-to-sales multiple of about 8.5 based on next year's analyst estimates, while its forward price-to-earnings (P/E) ratio is about 33, and its price/earnings-to-growth (PEG) ratio is 0.84. A PEG ratio under 1 is typically considered undervalued, and growth stocks will often have PEG ratios well above 1.
CRM PS Ratio (Forward 1y) data by YCharts
However, for the stock to keep its current momentum, it will need to start to see its revenue growth start to accelerate. That isn't expected to happen next quarter, but the company is starting to plant the seeds of future growth with its new Agentforce platform.
Previously, Salesforce CEO Marc Benioff has talked about having 1 billion AI agents deployed by the end of fiscal 2026, which would be a $2 billion opportunity based on its pricing structure. There could also be some halo effect, where Agentforce helps increase sales and upsells with its other core cloud platforms. That's the start of solid growth that can help the company return to the teens in revenue growth.
Given this opportunity, it looks like the momentum for this SaaS leader can continue moving forward. As such, I think it is a solid option for investors to consider at current levels.
