What Happened?
Shares of CRM software giant Salesforce (NYSE:CRM) fell 5.8% in the morning session after the company's second-quarter results featured an underwhelming forecast and a miss on a key sales metric.
While Salesforce beat Wall Street's estimates for both revenue and profit in the quarter, its guidance for the next quarter came in around $10.27 billion, merely in line with expectations. More concerning for investors was the performance of its billings, a key indicator of future revenue. Billings, which represent the cash collected from customers in a period, grew just 6% to $8.99 billion, falling short of what analysts had anticipated. This combination of an uninspiring forecast and slower growth in billings raised concerns about future demand and overshadowed the solid quarterly performance, prompting a sell-off in the shares.
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What Is The Market Telling Us
Salesforce’s shares are not very volatile and have only had 7 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful, although it might not be something that would fundamentally change its perception of the business.
The biggest move we wrote about over the last year was 9 months ago when the stock gained 13.4% on the news that the company reported third-quarter results that exceeded analysts' sales and adjusted operating income expectations. On the other hand, EPS and some top-line growth indicators, including billings and remaining performance obligations (RPO), fell slightly below consensus estimates as products like Tableau, MuleSoft, and Slack revealed some weaknesses. Despite the mixed top-line result, CRM recorded double-digit growth in the Sales and Service Cloud segments, which is encouraging. However, the highlight of the quarter is the commendable progress recorded on the AI front. Agentforce, the company's AI offering, went into production during the quarter, and the company has already delivered 200 deals. Agentforce functions like a dynamic network of AI co-workers—agents that collaborate with humans to manage diverse customer needs while enabling employees to focus on more productive tasks. To illustrate its potential, the company shared an example of a customer who deployed over 10,000 agents within just three days. Beyond Agentforce, the company's broader AI initiatives saw remarkable growth. CRM signed over 2,000 AI-related deals during the quarter, with the number of contracts valued at over $1 million more than tripling year-over-year. These developments helped the market overlook slightly disappointing sales and earnings guidance, which fell below Wall Street's estimates for the next quarter. The stock's positive reaction reflects investors' growing confidence in the transformative potential of the AI market for software companies. It also underscored the resolve needed to avoid missing the forest for the trees for those jumping on the AI bandwagon.
Salesforce is down 27.1% since the beginning of the year, and at $240.96 per share, it is trading 34.5% below its 52-week high of $367.87 from December 2024. Investors who bought $1,000 worth of Salesforce’s shares 5 years ago would now be looking at an investment worth $946.05.
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