Salesforce Inc. (CRM) experienced its most significant stock drop in nearly two decades after projecting the slowest quarterly sales growth in its history.
The company’s revised outlook has heightened investor fears that it might lag in the rapidly advancing artificial intelligence (AI) sector.
Unprecedented Decline
On Wednesday, Salesforce shares fell by as much as 21% to $212, marking the largest intraday decline since July 2004. The company’s forecast of an 8% increase in revenue to $9.25 billion for the period ending in July fell short of analysts' expectations, which averaged $9.35 billion. Profit, excluding certain items, is anticipated to be around $2.35 per share, again missing analyst estimates.
On Wednesday, Salesforce shares fell by as much as 21% to $212, marking the largest intraday decline since July 2004. The company’s forecast of an 8% increase in revenue to $9.25 billion for the period ending in July fell short of analysts' expectations, which averaged $9.35 billion. Profit, excluding certain items, is anticipated to be around $2.35 per share, again missing analyst estimates.
Revenue Growth Concerns
This projection would be Salesforce’s first instance of single-digit sales growth since it became a publicly traded company nearly two decades ago. The slow growth has stirred anxiety among investors, especially as the company had shifted its focus from rapid expansion to bolstering profits over the past year.
This projection would be Salesforce’s first instance of single-digit sales growth since it became a publicly traded company nearly two decades ago. The slow growth has stirred anxiety among investors, especially as the company had shifted its focus from rapid expansion to bolstering profits over the past year.
AI Aspirations and Market Response
Salesforce’s management has underscored the potential for AI-driven software to enhance future revenue. CEO Marc Benioff emphasized the company’s readiness to leverage AI advancements over the next decade. However, most analysts believe that Salesforce's generative AI features won’t significantly impact revenue until 2025 or 2026.
The outlook had a ripple effect across the software sector, with shares of Oracle Corp. (ORCL), ServiceNow Inc. (NOW), and SAP SE also declining. In contrast, C3.ai Inc. (AI) saw a rally due to a stronger-than-expected sales forecast.
Salesforce’s management has underscored the potential for AI-driven software to enhance future revenue. CEO Marc Benioff emphasized the company’s readiness to leverage AI advancements over the next decade. However, most analysts believe that Salesforce's generative AI features won’t significantly impact revenue until 2025 or 2026.
The outlook had a ripple effect across the software sector, with shares of Oracle Corp. (ORCL), ServiceNow Inc. (NOW), and SAP SE also declining. In contrast, C3.ai Inc. (AI) saw a rally due to a stronger-than-expected sales forecast.
Strategic Shifts and Market Dynamics
The disappointing outlook comes as Salesforce faces challenges in the broader market. The AI boom has primarily benefited hardware and chip companies like Nvidia Corp. (NVDA) and Dell Technologies Inc. (DELL), while software companies, including Salesforce, have struggled to keep pace.
The disappointing outlook comes as Salesforce faces challenges in the broader market. The AI boom has primarily benefited hardware and chip companies like Nvidia Corp. (NVDA) and Dell Technologies Inc. (DELL), while software companies, including Salesforce, have struggled to keep pace.
Rishi Jaluria, an analyst at RBC Capital Markets, pointed out that the intense focus on AI might detract from Salesforce’s traditional strengths. “I would question if a lot of the focus by CIOs on AI is coming at the expense of expansions at Salesforce,” Jaluria noted.
Financial Performance and Expectations
In the fiscal first quarter ending April 30, Salesforce reported an 11% increase in revenue to $9.13 billion, with profit, excluding certain items, at $2.44 per share. Both figures slightly missed analysts' projections. Additionally, the current remaining performance obligation (CRPO), a key measure of contracted sales, rose by 10% to $26.4 billion, falling short of expectations.
Chief Operating Officer Brian Millham highlighted that customers exhibited caution during the quarter, opting for smaller purchases and extending decision-making timelines. This cautious behavior mirrors trends observed in the first half of the previous year.
In the fiscal first quarter ending April 30, Salesforce reported an 11% increase in revenue to $9.13 billion, with profit, excluding certain items, at $2.44 per share. Both figures slightly missed analysts' projections. Additionally, the current remaining performance obligation (CRPO), a key measure of contracted sales, rose by 10% to $26.4 billion, falling short of expectations.
Chief Operating Officer Brian Millham highlighted that customers exhibited caution during the quarter, opting for smaller purchases and extending decision-making timelines. This cautious behavior mirrors trends observed in the first half of the previous year.
Future Prospects and Strategic Focus
Despite the current challenges, Salesforce continues to see strong performance in specific areas, particularly its Data Cloud, which organizes information for AI analysis. The business unit, including Data Cloud, MuleSoft, and Tableau, reported a 24% increase in revenue to $1.4 billion, exceeding analyst expectations.
Salesforce recently contemplated acquiring Informatica Inc., a data-organization software maker, but talks did not progress. Executive Vice President Mike Spencer emphasized that acquisitions remain a strategic component, provided they are not dilutive and meet key metrics.
Despite the current challenges, Salesforce continues to see strong performance in specific areas, particularly its Data Cloud, which organizes information for AI analysis. The business unit, including Data Cloud, MuleSoft, and Tableau, reported a 24% increase in revenue to $1.4 billion, exceeding analyst expectations.
Salesforce recently contemplated acquiring Informatica Inc., a data-organization software maker, but talks did not progress. Executive Vice President Mike Spencer emphasized that acquisitions remain a strategic component, provided they are not dilutive and meet key metrics.
Conclusion
The recent plunge in Salesforce shares underscores the market’s sensitivity to growth prospects and the competitive pressures from the AI sector. While Salesforce's long-term strategy remains focused on integrating AI capabilities, the immediate outlook suggests a period of cautious growth and strategic reassessment. Investors will closely monitor how Salesforce navigates these challenges and capitalizes on emerging opportunities in the AI landscape.
The recent plunge in Salesforce shares underscores the market’s sensitivity to growth prospects and the competitive pressures from the AI sector. While Salesforce's long-term strategy remains focused on integrating AI capabilities, the immediate outlook suggests a period of cautious growth and strategic reassessment. Investors will closely monitor how Salesforce navigates these challenges and capitalizes on emerging opportunities in the AI landscape.
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