Salesforce Is Solidifying Its Leadership With Enterprise Cloud Customers But Market Growth Expectations Are High

Salesforce May Be A Rare Example Of Unlocking Competitive Moat With AI

• I believe that AgentForce will replace interactive chatbots at a higher price.
• CRM has a wide competitive advantage against AI peers because it can train models on customer data.
• Incremental margin improvements lead me to upgrade my profitability estimates.
• CRM has the potential to accelerate revenues as AI has the most touch points between the software and end-users.
• I believe that the market’s expectations of free cash flows are higher than CRM’s capacity.

Salesforce posted Q3’25 revenues of $9.44B, up by 8% YoY. The company expects its full-year 2025 revenue to be around $38B.

While the reported growth and forward guidance diverge from my 13% revenue CAGR estimates, I will maintain them since I think that the company can re-accelerate based on their AgentForce pitch, and ultimately reach my 2028 target of $61.5B.

The company improved profitability margins, with the operating margin rising by 2.8% to reach 20%, and the net margin of 16.1%, up by 24% vs 13% YoY. The company is incrementally increasing its profitability, and I am upgrading my estimates from 17.5% in 2028 to 20% in 2029.

Management noted that they are hiring 1.4K new sales reps to focus on AI in Q4, and propose that in-house AI tools will free up hundreds of millions of expenses that can be reinvested back into the business. While it is striking that management proposes AI will free up operating expenses while at the same time hiring a new salesforce, this phenomenon can be explained using the Jevons Paradox: increased efficacy reduces costs, but the resulting increase in demand outweighs cost-savings.

AgentForce Will Stick, Here’s What Changed My Mind

I am changing my view about what competitors can achieve against Salesforce on the AI front. My previous assumption was that due to the widespread development of AI technology, competitors can easily introduce new and cheaper tools that take market share away from Salesforce. While this is largely true, there is one thing that competitors don’t have: proprietary data. 

The customers’ data is CRM’s advantage, and I expect Salesforce to improve the training of AI from their proprietary data pool, giving customers valuable models that are immediately ready for use.

Customers may try to migrate data away from Salesforce, but this will likely be a difficult process that becomes more costly the larger the customer. The size of the customer is also a factor for their lifetime value and services tend to have lower churn rates as customers adopt more products (p. 12). There is a good incentive structure set-up for this as managers can justify adding SaaS expenses from the immediate ROI from adopting additional Salesforce products.

The other side to consider is that Agentforce will cannibalize Salesforce’s core interactions bot features, but the company may be able to upsell the feature at a higher price. This means that Agentforce may contribute to revenue and profitability growth from existing customers as it offers a better value proposition than traditional chatbots. This is fundamentally why I’m ok with allowing some leeway for reacceleration in my projections. 

Salesforce Acquisitions Will Pressure Free Cash Flows

After a brief period of calm between 2020 and 2024, Salesforce jumped back on acquisition-driven growth and has announced or completed 5 acquisitions in 2024. The largest acquisition candidate pending regulatory approval is Own, set to cost $1.9B in an all cash transaction, expecting to close in January 2025.

The return of acquisitions as a business-as-usual phenomenon needs to be reconciled in the free cash flow projections. Analysts (1, 2) seem to value the company using FCF, and even assign conservative 20x to 25x exit multiples. However, since the company is moving forward with acquisitions, we want to build-in acquisition expenses as a capex item in the FCF calculation.

Looking at the company’s Q3 report, FCF margin is 30%, amounting to $1.8B. If we apply the margin on the FY’25 guide of $38B, we get implied FCF of $11.4B - an outstanding value, and one that easily justifies a $300B market value. However, if we build-in the annualized expectation of acquisitions, we may want to include a $2 to $2.5B annual acquisition expense - this brings the FCF value down to about $9B. 

Further, we need to address stock-based-compensation. Using the full-year SBC guidance of $3.2B and subtracting it from the remaining $9B, we now get around $5.8B in what I would consider to be a better approximation of CRM’s free cash flows. We now arrive at a value much closer to the net income guide of around $6B, and in my view, what investors can expect to claim from CRM. 

Valuation Update

I’m extending my projections to 2029, with a revenue estimate of $67.2B. I believe that the company’s improvement in performance will lead to a margin expansion and am upgrading my target net income margins from 17.5% to 20%, resulting in $13.4B in 2029.

At a 2029 exit multiple of 21x, the value of CRM comes up to $272B or $314 per share. Discounted back at a 7% rate, the present value comes up to $224 per share or $201B.

Despite analysts using forward FCF as the basis for modeling CRM, I think that the stock is trading around a 5-year premium. This divergence of opinion explains most of the difference between the market value and how I value the stock.