Low expectations make for unfamiliar ground at Salesforce. Given the uncertainty that artificial intelligence has cast over the cloud software industry, they may also be welcome.
As Salesforce kicks off its annual confab known as Dreamforce this week, the pioneer of the software-as-a-service — or SaaS — category finds itself with a lot to prove. Years of turbocharged revenue growth through relentless sales deals and acquisitions has finally slackened, with Salesforce’s revenue expected to rise at a single-digit percentage for the first time ever in the current fiscal year. That has put a bit of a cloud over the company’s stock price, which is down about 2% since the start of the year.
At least Salesforce has plenty of company. Adobe, Workday, Atlassian and Snowflake are just a few of the SaaS providers that have seen their shares take a hit; the BVP Nasdaq Emerging Cloud Index has shed more than 10% so far this year. Like Salesforce, many are struggling with slowing growth rates, causing investors to worry that the sharp rise of generative-AI investments is squeezing other tech categories on corporate budgets, making major sales deals harder to close.
Some generative-AI proponents also believe the technology will ultimately supplant pre-written software altogether. Klarna CEO Sebastian Siemiatkowski reportedly told a group of the buy-now-pay-later provider’s investors last month that the company was shutting down its use of Salesforce and Workday because it feels it can use AI tools to replicate those services. That could turn out to be a stretch, especially for a company working in the highly regulated field of consumer finance. Still, the few SaaS stocks that have done well this year, such as ServiceNow, have done so by maintaining strong growth and deal closure rates in the current environment.
Salesforce is placing a major bet on a new offering called Agentforce. This is a set of so-called AI “agents” that can be easily programmed by customers using Salesforce’s existing software tools to automate things such as customer service, marketing campaigns and business procurement. AI agents aren’t brand new; ServiceNow announced its new AI-agent tools last week.
But Salesforce seems to have pivoted quickly to the technology. The company first discussed Agentforce in its last earnings call three weeks ago and formally announced the service last week ahead of its Dreamforce conference. And this is just the beginning; Salesforce CEO Marc Benioff told a Goldman Sachs investment conference last week that Salesforce will be hosting 25 more events between now and the end of the year to push Agentforce to its customer base.
Salesforce will be selling hard, in other words. And it needs to. While its financial performance improved in the last quarter compared with a disastrous report three months prior, Salesforce still expects revenue to grow by less than 9% in the fiscal year ending in January — half the growth rate it averaged over the previous three years. The company has sharply improved its adjusted operating margins over that period, but single-digit growth is still a tough pill to swallow — especially with older and bigger software players such as Microsoft and Oracle accelerating past it.
Wall Street is thus eager to see what the company can do with Agentforce, and AI in general.
“We don’t blame Salesforce for leaning hard into AI technologies since this may be the company’s biggest existential threat over the next several years,” wrote John DiFucci of Guggenheim in a note to clients last month following the latest earnings report.
And, relative to other AI-hyped companies at least, the bar for Salesforce may actually be low.
“At this point, we believe very little optimism is priced into the shares as it relates to the company’s AI opportunity,” wrote Kirk Materne of Evercore ISI.
Having nowhere to go but up isn’t always a bad place to be.