Investments In Agentforce And Data Cloud Will Expand AI Adoption Across Industries

Key Takeaways

• Salesforce's new AI and data products are expected to drive substantial revenue growth and enhance operational efficiency.
  
• Transitioning to consumption-based pricing and leveraging cloud partnerships could boost earnings and improve cost-effective deployments.
  
• Increasing competition, new product uncertainties, pricing model shifts, economic headwinds, and reliance on external partnerships threaten Salesforce's revenue growth and financial stability.

Catalysts

Provides Customer Relationship Management (CRM) technology that brings companies and customers together worldwide.

• Salesforce's new products, Data Cloud and Agentforce, are anticipated to become multibillion-dollar product lines, suggesting significant future revenue growth driven by AI and data solutions.
  
• The unified platform strategy, which integrates Customer 360 apps, Data Cloud, and Agentforce, is expected to enhance operational efficiency and customer success, potentially improving net margins.
  
• The transition to consumption-based pricing models for Agentforce and Data Cloud could expand contract sizes and offer a more flexible pricing structure, likely boosting earnings and revenue stability.
  
• Investment in infrastructure partnerships with AWS, Alibaba, and Google allows Salesforce to deploy its products cost-effectively, potentially increasing net margins by lowering deployment costs.
  
• Salesforce plans further investment in Agentforce and Data Cloud, aiming for strong future revenue contributions, especially as agentic technologies become more widely adopted across industries.

Salesforce Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Salesforce's revenue will grow by 9.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.4% today to 20.1% in 3 years time.
• Analysts expect earnings to reach $9.9 billion (and earnings per share of $10.4) by about March 2028, up from $6.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 44.1x on those 2028 earnings, down from 44.8x today. This future PE is greater than the current PE for the US Software industry at 29.5x.
• Analysts expect the number of shares outstanding to decline by 0.83% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.53%, as per the Simply Wall St company report.

Salesforce Future Earnings Per Share Growth

Risks

• Increasing competition in the AI and digital labor market could pressure Salesforce's existing revenue streams and potentially lead to reduced margins if they need to lower prices or increase spending to maintain their market position. This could impact the company's overall revenue and pricing model.
  
• Risks associated with the potential failure of the new Agentforce and Data Cloud products to meet growth expectations, as the contribution to revenue from these products is modest, raising concerns about the sustainability of Salesforce's projected revenue growth.
  
• The transition from a seat-based to a consumption-based pricing model for products like Agentforce may lead to unforeseen challenges, potentially complicating revenue projections and affecting earnings if consumption does not reach projected levels.
  
• Economic headwinds such as foreign exchange pressures and macroeconomic factors could negatively impact Salesforce's revenue growth and net margins, evident from the forecasted revenue headwind from currency fluctuations.
  
• Salesforce's heavy reliance on strategic partnerships and third-party infrastructure providers like Amazon, Google, and Alibaba for the cost-effective deployment could pose a risk to their margins and financial stability if these partnerships encounter disruptions or if infrastructure costs increase.

Valuation

• The analysts have a consensus price target of $375.364 for Salesforce based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $442.0, and the most bearish reporting a price target of just $243.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $49.3 billion, earnings will come to $9.9 billion, and it would be trading on a PE ratio of 44.1x, assuming you use a discount rate of 7.5%.
• Given the current share price of $288.61, the analyst price target of $375.36 is 23.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.