What Happened?
Shares of customer relationship management software maker Salesforce (NYSE:CRM) jumped 13.4% in the morning session after 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.
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What The Market Is Telling Us
Salesforce’s shares are not very volatile and have only had 6 moves greater than 5% over the last year. Moves this big are rare for Salesforce and indicate this news significantly impacted the market’s perception of the business.
The biggest move we wrote about over the last year was 6 months ago when the stock dropped 20.2% on the news that the company reported first-quarter earnings results with key topline metrics, including revenue and billings, falling below expectations. The company experienced softer bookings in the quarter due to elongated deal cycles, deal compression, and high levels of budget scrutiny. It called out continuing pressure in the professional services business and also observed some volatility in the Licensing segment.
Moving on, management expects the measured buying behavior observed in Q1 to continue throughout the fiscal year, which points to a challenging sales environment. As a result, it gave revenue guidance for the next quarter, which missed analysts' expectations. Full year subscription revenue guidance was also lowered. While the company maintained its revenue guidance for the full fiscal year, the expected growth rate of 8% to 9% is relatively modest compared to previous years.
Lastly, the company expects stock-based compensation to be slightly above 8% of revenue, a modest increase from prior guidance.
Overall, this was a bad quarter for Salesforce, as investors are likely to tame their optimism following the weak performance and guidance.
Salesforce is up 41.1% since the beginning of the year, and at $361.28 per share, has set a new 52-week high. Investors who bought $1,000 worth of Salesforce’s shares 5 years ago would now be looking at an investment worth $2,309.
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