Salesforce surges on revenue beat, AI growth prospects – here’s our new price target for the stock

Shares of Salesforce surged in extended trading Tuesday after the enterprise software giant reported better-than-expected quarterly revenue and issued a solid forecast for the current period. But most importantly, the company showed that Agentforce, its new AI platform, may kickstart revenue growth in the future. Revenue in the fiscal 2025 third quarter increased 8% year over year to $9.44 billion, above both the high end of guidance and the $9.35 billion expected by analysts, according to estimates compiled by LSEG. Adjusted earnings per share of $2.41 increased 14% on an annual basis, missing the $2.44 projected by analysts, LSEG data showed. Adjusted operating margin expanded to 33.1% in the three months ended Oct. 31, beating the consensus estimate of 32.27%, according to FactSet. On a Generally Accepted Accounting Principles (GAAP) basis, operating margin came in at 20%, above the expected 18.93%. CRM YTD mountain Salesforce’s stock performance in 2024. Bottom line Salesforce delivered the goods. With the stock up more than 10% to $360 per share in extended trading, we are increasing our price target to $400 from $300. However, we are keeping our 2 rating due to its recent rally, meaning we’d wait for pullbacks before adding to the position. Wall Street is willing to look past Salesforce’s slight miss on adjusted EPS because of the upbeat revenue performance. Investors know Salesforce has become disciplined on margins, but what the market really wants to see next to take the stock higher is better topline growth. The quarterly results and outlook demonstrated that the company’s fundamentals have remained resilient without any contribution from one of the most exciting product launches in its history: Agentforce. Salesforce Why we own it : Salesforce is a leading enterprise software tool for companies across all industries, helping employees to better communicate with colleagues internally and with their customers. The company’s balance of margin expansion with the potential for faster topline growth — aided by AI adoption — should lead to strong earnings growth. Competitors : SAP , Microsoft , HubSpot Most recent buy : Dec. 21, 2022 Initiation : June 15, 2018 Agentforce is the company’s platform of AI-powered assistants that can perform tasks and make decisions autonomously. This new product has completely reshaped the stock’s narrative . When the stock traded in the low $200s over the summer, there was a fear that AI would disrupt Salesforce’s business model. The concern was basically that if companies needed fewer workers thanks to AI, companies that sell software licenses on a per-person basis may, as a result, experience softer demand. Salesforce crushed this bear thesis over the past few months — and especially after its annual Dreamforce conference in September, when it unveiled Agentforce in earnest. The platform only became generally available in the last week of Salesforce’s reported quarter, so it’s still too early in the adoption cycle to materially contribute to critical financial metrics, such as current remaining performance obligation, or cRPO. That metric reflects the amount of contracted revenue expected to be recorded in the next 12 months. RPO, by contrast, is the total value of contracted revenue. Despite its newness, Agentforce is off to an incredible start, which is very promising for what’s ahead. “We have become a supplier of digital labor. … This digital labor opportunity is incredible, and we could not be more excited,” CEO Marc Benioff told Jim Cramer on “Mad Money” on Tuesday night. “The results, starting in this quarter, are already showing what is going to be possible for the future. We closed over 200 Agentforce deals in the first week of it being available.” Benioff said early customers include appliance maker SharkNinja , London’s Heathrow Airport and recruitment firm Adecco. Benioff added on the earnings call that the Agentforce pipeline “is in the thousands for potential transactions” in future quarters. The market had high expectations for Agentforce coming into the quarter, evidenced by Salesforce shares up more than 30% since Dreamforce in mid-September. What we learned Tuesday evening backs up the hype, and it could be just the thing the company needs to reaccelerate revenue growth back to at least 10%, a key level for investors. Quarterly commentary At a high level, it’s clear Agentforce and Salesforce’s other AI-related solutions have provided a new energy into dealmaking. It has put to rest worries about elongated sales cycles, greater deal scrutiny, and other software sales buzzwords that plagued the industry since 2022. In the third quarter, the company said the number of contract wins worth more than $1 million with AI tools included more than tripled year over year. Executives said the total number of AI deals exceeded 2,000, including the more than 200 Agentforce deals we mentioned earlier. Salesforce’s Data Cloud application — which helps unify data from multiple sources into one platform — may be a key driver of those other contracts. Salesforce refers to its various applications as “clouds,” such as Sales and Service Cloud. Salesforce is seeing momentum across multi-cloud deals, which is a great sign. Its top 25 deals in the quarter averaged more than five clouds each. Deals involving multiple applications are especially encouraging to investors because that suggests companies will be stickier customers. “Our multi-cloud strategy is also core to our financial strategy,” CFO Amy Weaver said on the earnings call. “Multi-cloud customers have higher spend, lower attrition rates and drive significant [annual recurring revenue] expansion for us each quarter.” The company said back in August that Weaver will step down as CFO but remain in the position until a successor was named. Salesforce recorded a notable profitability milestone in the third quarter: Its GAAP operating margins reached 20% for the first time in company history, an important step in management’s ongoing cost discipline journey. But one thing to keep in mind in the quarters ahead is the level of investment needed to support growth opportunities in Agentforce and Data Cloud. To meet the demand for Agentforce, the company plans to hire 1,400 account executives across the world in the fourth quarter. Salesforce bought back about $1.2 billion worth of stock in the August-to-October quarter, a step down from the $4.3 billion it repurchased in the prior three-month period. Still, its total diluted share count fell sequentially to about 965 million from 973 million, which is what matters the most. Salesforce is delivering on a repurchase program that has more than offset dilution from stock-based compensation — once a point of contention for some investors. On a year-over-year basis, its diluted share count is down 2%, and the company has about $10.6 billion remaining under its $30 billion authorization. Guidance For the fiscal fourth quarter, Salesforce expects revenues of $9.9 billion to $10.1 billion. The midpoint of $10 billion is relatively in line with the consensus estimate of $10.05 billion, according to LSEG. On the bottom line, the company expects adjusted earnings per share of $2.57 to $2.62, which at the midpoint of about $2.60 missed LSEG’s consensus estimate of $2.66. Salesforce expects its cRPO to increase 9% year over year to an implied $30 billion, which is roughly in line with the consensus forecast of $30.08 billon, FactSet data showed. As a reminder, Salesforce does not expect a material contribution to cRPO from Agentforce-related bookings. On a full-year basis, the company raised the low end of its revenue guide and increased its operating margin and adjusted operating margin outlook. It also raised its operating cash flow guidance. (Jim Cramer’s Charitable Trust is long CRM. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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