Salesforce: Einstein Can Be Trusted, Thanks To Data Cloud

Summary:

• Salesforce delivered an impressive Q4, beating expectations on both revenue and EPS.
• The company’s Data Cloud and Einstein Copilot are expected to be the top catalysts for future growth.
• The upcoming TrailblazerDX Developer Conference will be a key event to watch for updates on AI initiatives.

Investment Thesis

Salesforce (NYSE:CRM) delivered an impressive fourth quarter, beating on both the top and bottom lines. Despite issuing a lighter-than-expected revenue guidance, the company’s overall guidance for FY25 was strong, especially from a margin and profitability perspective. The company also initiated its first-ever quarterly dividend.

In this article, I analyze the company’s fourth-quarter performance as well as argue why Data Cloud and Einstein Copilot are the top catalysts for the company’s next leg of growth. I previously covered Salesforce in December 2022 where I gave it a “Hold” rating.

Fourth Quarter Highlights

CRM had a solid fourth quarter, ending the year on a high. Revenues came in at $9.29 billion, up 10.77% y/y, beating analyst estimates by $66.57 million. Non-GAAP diluted EPS, during the fourth quarter, came in at $2.29, beating estimates by $0.02.

For the full year, revenues amounted to $34.9 billion, up 11% y/y. On the margins front, the company finished the year strong, with operating margins coming in at 30.5%, up 800 bps y/y. The company finished the year with an impressive remaining performance obligations (RPOs) of $56.9 billion, up 17% y/y, of which current RPOs were $27.6 billion.

FY25 guidance, however, was mixed. The company now expects FY25 revenues to come in between $37.7 to $38 billion, below the analyst expectations of $38.65 billion. FY25 EPS, however, is now expected to be between $9.68 and $9.76 per share, well above the estimate of $9.61.

The company also authorised its first ever quarterly dividend of $0.40 per share, and further increased its share buyback program by $10 billion, which leaves the remaining balance on the current buyback program at approximately $18 billion.

Underlying Strength in Data Cloud Bodes Well for CRM’s AI Ambitions

The reason why I am convinced, especially after its Q4 earnings report, that CRM will be a major player in the AI space is the company’s Data Cloud. The ability of Data Cloud, to personalise data and update in real-time, would be a real blessing for enterprises. Furthermore, Data Cloud relies on CRM’s metadata, which means that the data stored in Data Cloud is visible and can be used by any user of Customer360, CRM’s all-in-one bundle of its entire product portfolio.

The uniqueness and reliability of Data Cloud is already attracting customers for CRM. In the fourth quarter, 25% of the company’s deals, which were valued at more than $1 million, included Data Cloud. The segment is approaching $400 million in ARR and while this may not have a material impact in the near-term for a company that generated $38 billion in revenues in FY24, the year-over-year growth of nearly 90% suggests that it could be a meaningful contributor to the company’s top and bottom lines in the long-term.

Furthermore, Data Cloud is what is powering the company’s Einstein AI tool. As such, customers of Data Cloud would automatically use Einstein, driving growth there. And given that the underlying foundation of Data Cloud is CRM’s metadata, Einstein would be more accurate, personalised, and reliable, which should enable it to gain the trust of CRM’s enterprise customers. No surprises then that Data Cloud was labelled a leader in Gartner’s first Magic Quadrant report for Customer Data Platforms (CDPs).

During the Q4 earnings call, CEO Marc Benioff launched a staunch attack against existing generative AI applications, branding these AI models as “confident liars, producing misinformation, hallucinations.” It is under this context that he made his pitch about how Einstein could be a differentiator, especially to enterprises, because of the company’s ability to integrate “data and metadata.” Based on how Data Cloud is built and given that it is Einstein’s feeder, the AI tool can be trusted in my opinion.

And because Einstein is driven by Data Cloud, more than the platform itself, how fast the company can attract customers to Data Cloud will be the catalyst for the rate of adoption of Einstein, and subsequently for the next leg of growth of the company.

All Eyes Will be on Einstein Copilot at TrailblazerDX

More than CRM’s fourth quarter earnings report, investors are likely to be focused on the company’s TrailblazerDX Developer Conference, which takes place next week. And all eyes will be on the company’s Einstein Copilot and what the company’s future plans are with respect to AI.

The company already launched the beta version of the Einstein Copilot last week, and is already seeing “enormous demand.” I don’t find this surprising because in my opinion, the Copilot’s features have all the potential to make it a differentiating product for enterprises.

First, given that the Copilot functions on Salesforce’s own metadata, customers would be relying on their own private data to generate responses from Copilot. Second, Copilot maintains strict data governance and enhanced privacy. For enterprise customers, this is a must, given how they have their own privacy matters to handle when it comes to client data.

Furthermore, the matter of privacy and data protection has even attracted the interest of regulators, with more than a quarter of US state legislatures currently considering bills focusing on regulation of private sector’s use of AI. FTC Chair Lina Khan, who has been on a warpath against the mega-tech companies in my opinion, recently warned that her agency will vigorously regulate AI tools, claiming that “peoples’ sensitive health data, geolocation data and browsing data is simply off limits for model training.” As such, the privacy and the data security features of the Einstein copilot are key differentiators, which should enable it to gain traction among the company’s customers.

In my last article where I covered Palo Alto Networks, I mentioned that global spending on AI software is expected to grow at a CAGR of 19.1% by 2027. In my opinion, CRM stands to significantly benefit from this explosive growth, because of the way its AI tools operate and based on the manner in which they are trained. Moreover, the fact that Einstein Copilot will be part of the Customer360 package and given that Copilot is trained on real-time data also means that customers can enhance their productivity a lot faster, without having to spend separately on AI tools.

As such, on the basis of current evidence, there is nothing to suggest that Einstein Copilot will not be a successful venture. How fast CRM can launch it on a wider scale remains the only question.

Valuation

Forward P/E Approach
Price Target	$355.00
Projected Forward P/E Multiple	31.5x
Projected FY25 EPS	$9.72
Projected PEG Ratio	1.95
FY26 Earnings Growth	16.1%
Projected FY26 EPS	$11.28

Click to enlarge

Source: Company’s Q4FY24 Press Release, LSEG Workspace (formerly Refinitiv), and Author’s Calculations

CRM, according to LSEG Workspace (formerly Refinitiv), currently trades at a forward P/E of 31.5x, in line with Microsoft (32x), but well below its other peers such as ServiceNow (56.3x) and Snowflake (180.1x). While it’s too early to factor in Einstein Copilot into the company’s bottom line, the growth potential has to be considered. As such, I have maintained a forward P/E of 31.5x for my calculations.

The company now expects FY25 non-GAAP diluted EPS to be between $9.68 and $9.76. I have assumed the mid-point of this guidance, $9.72, for my calculations. This is a reasonable estimate, given that the company’s stock-based compensation is expected to be below 8% of revenues along with the continued popularity of Data Cloud.

CRM, according to LSEG Workspace (formerly Refinitiv) currently trades at a forward PEG ratio of 1.95. Given the growth potential thanks to Einstein Copilot and the continued adoption of Data Cloud, along with the investments the company is making in these areas, this is a reasonable estimate. As such, I have assumed this ratio for my calculations.

A forward PEG ratio of 1.95 and a forward P/E of 31.5x would imply an earnings growth of 16.1%. This would imply that FY26 EPS would come in at $11.28. A forward P/E of 31.5x and an EPS of $11.28 would result in a price target of about $355, which represents an upside of approximately 15% from current levels.

While there is a healthy upside from current levels, there are significant short-term trends that investors need to consider. For instance, the announcements that the company makes, especially surrounding Einstein Copilot, during next week’s TrailblazerDX, would be a major stock price mover.

Risk Factors

The main risk facing the company is the rate at which, the company can incorporate its AI tools on its Customer360 platform. At this stage, the company has only launched a beta version. And after Google’s Gemini debacle, one must be cautious on any new AI tool, no matter how successful it can be on paper. Mishaps such as the one faced by Gemini could derail CRM’s path to growth and profitability.

Then there’s the lighter-than-expected revenue guidance, which suggests that the company does have challenges with the customers. Would potential customers wait for the company to fully integrate Einstein Copilot into its product bundle before purchasing CRM products? The company sees no material impact, from its AI offerings, to its top and bottom lines in FY25. As such, whether we will see a pause in the company’s growth, in the short-term, remains to be seen.

Concluding Thoughts

CRM had a solid quarter, beating both on the top and bottom lines. While the revenue guidance was lighter-than-expected, the company’s EPS forecasts came in higher than expected. Furthermore, the company continues to be a shareholder friendly company, boosting its buyback by $10 billion and also initiating its first ever quarterly dividend.

From a long-term perspective, however, I am more interested in how Data Cloud and subsequently, Einstein would perform. The company has an amazing AI tool in its hands, in my opinion, one that is built with more reliability and that accounts for data security and privacy. It’s a tool that enterprises would absolutely love, especially since they can purchase it as part of the Customer360 platform, rather than pay for it independently.

As such, it is not this quarter but next week’s TrailblazerDX Developer Conference that would shed more light on how the company’s future growth trajectory looks like. On the most recent evidence, however, there are no indications that suggest CRM can’t be a leader in AI, especially in the enterprise software space.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in CRM over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I have a beneficial Long position in the shares of MSFT either through stock ownership, options, or other derivatives.

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