Unveiling Salesforce’s Future: Insights From World Tour NYC

Summary:

• The World Tour NYC showcased Salesforce’s Einstein GPT and Genie as noteworthy AI offerings poised to enhance customer service and sales processes.
• Salesforce’s commitment to AI and data integration, as presented during the World Tour, demonstrates a strategic move towards becoming a data-driven company, which could provide a significant competitive advantage.
• Despite the enthusiasm generated at the World Tour, the competitive AI landscape and potential economic downturns present substantial challenges for Salesforce’s market positioning and future growth.

In a previous analysis, we expressed a measured outlook on Salesforce (NYSE:CRM), identifying challenges such as macroeconomic uncertainties, intensifying AI competition, and economic sensitivity as potential impediments to Salesforce’s growth trajectory. Since then, the AI landscape has evolved at a breakneck pace, a testament to the dynamic environment we navigate today.

Just this month, we had the privilege to attend two key industry events: Salesforce’s World Tour NYC and Google’s I/O 2023. Our impressions and insights from Google’s event have already been shared. As for the Salesforce World Tour, it gave us a renewed perspective on the company’s unique offerings and strategic positioning.

In this article, we aim to share our critical insights from the World Tour, re-evaluate Salesforce’s competitive edge, and provide an updated appraisal of the company’s value. Our newfound enthusiasm for Salesforce’s prospects is something we are eager to delve into for our readers.

World Tour NYC: Key Takeaways

Salesforce’s World Tour in New York City, held earlier in May, was a momentous event with over 15,000 attendees, making it the largest ever in NYC. The energy and enthusiasm centered on the Einstein GPT use cases were palpable, highlighting the growing importance and impact of artificial intelligence (AI) in the CRM space.

The event, and especially the keynote presentation, predominantly emphasized AI and Salesforce’s Data Cloud. The unveiling of new AI functionality sparked much anticipation. While the business model for this function remains undefined, we see the incremental value addition through Generative AI as quite significant and impactful.

One demonstration featured a customer service scenario, where Einstein GPT pre-constructed a response for a customer wishing to modify a merchandise purchase. The AI knew the weather and the fan’s preferred team, suggesting a team-logo bucket hat for a sunny day. This scenario showed an agent who didn’t need to consult knowledge articles, type a response, or look up merchandise inventory.

Another instance was a sales situation where a hospitality representative received an account overview from Einstein GPT, which generated a proposal and created a private Slack channel for collaboration. These instances make clear the potential for AI to streamline customer service and sales processes.

The event also introduced Slack GPT, a modern home for business users where AI-generated workflows can coexist with personally generated ones. The AI can bring personal data into the workflow and can even be tasked with note-taking during meetings.

Data, as always, is critical. AI’s effectiveness is directly tied to the quality and connectedness of data. Salesforce Data Cloud aims to address this by providing a unified, real-time platform that can process 100 billion records daily. This isn’t just another data lake or warehouse; it’s an active platform that brings all customer interaction data right into the cloud. Salesforce Data Cloud, with integrated Tableau visualization, promises to unlock significant insights.

The event emphasized that the future of AI is not just predictive but generative, aimed at supercharging productivity and creating an autonomous enterprise. But how can we trust AI? Salesforce’s answer is Einstein GPT, which learns from trusted customer data, creating messages for sales and service teams, landing pages for marketers, and Apex code for developers.

One intriguing use case presented was Formula 1’s marketing landing page, which was personalized to the customer using GPT. Additionally, the demonstration showed the AI generating large Apex code, which developers can then modify to their liking. This is not about replacing the development process but rather accelerating it.

Financial & Valuation

Note: All historical data in this section comes from the company’s 10-K filings, and all consensus numbers come from FactSet.

CRM’s financial performance over the past few years presents a compelling case for investment, with revenue growing at a CAGR of 22.4%. This robust growth trajectory, combined with sell-side consensus forecasts of 10.6% revenue growth this fiscal year to $34.7 billion and 11.3% next year to $38.6 billion, underscores the company’s strong market positioning and potential for continued growth.

Of particular note is CRM’s EBIT margin, which has increased by 5.7 percentage points over the past three fiscal years, moving from 16.9% to 22.5%. With consensus forecasting further expansion by 452 basis points this year to 27.1%, and by an additional 276 basis points next year to 29.8%, we believe that the company’s profitability is on an upward trend.

However, we do have concerns about CRM’s share-based compensation (SBC) policy. Over the past three years, the company has allocated 10.4% of its revenue to SBC, leading to a 10.1% increase in diluted outstanding shares. This has caused EPS growth to lag behind revenue growth, registering a CAGR of 20.6% over the past three fiscal years. We would advise the company to reassess this strategy to prevent further dilution of shareholder value.

Looking ahead, the consensus forecast for EPS growth is quite optimistic, projecting an increase of 36.2% to $7.14 this fiscal year, and a further 25.2% increase to $8.94 next fiscal year. This, combined with a healthy net cash position of $1,647 million, suggests that CRM is financially robust and poised for future growth.

CRM’s current share price of $201.81 reflects a market value of $201.8 billion and an enterprise value of $200.2 billion, which is a testament to the company’s solid performance since going public 19 years ago. Despite the lack of dividends, CRM’s stock has outperformed the S&P 500, delivering a 25.8% absolute return in the past year, 19 percentage points more than the S&P 500.

However, CRM’s valuation does raise some concerns. The company currently trades at an FY2 EV/Sales multiple of 5.2, an EV/EBIT multiple of 17.4, a P/E multiple of 22.6, and an FCF multiple of 20.8. These metrics represent premiums of 137.0%, 11.2%, 34.7%, and 6.7% respectively, over the S&P 500, which could signal an overvalued stock. Yet, the company’s PEG ratio for FY2 is 1.2, a 20.2% discount compared to the S&P 500’s PEG ratio of 1.5, indicating that the stock may be undervalued when considering the company’s growth rate.

On the other hand, looking at CRM’s P/E multiple on forward 12-month estimates relative to its own 5-year history might suggest that the company is trading at a discount to itself, historically. Using this metric, the stock trades at 26.6x compared to its 5-year range of 23 to 70 times. We would hesitate to put too much weight on this metric since CRM today is a much more mature company today, and today’s interest rate environment is vastly different from previous years.

In addition, CRM’s large SaaS peers like Intuit (INTU), Adobe (ADBE), and Autodesk (ADSK) are all similarly trading at the lower end of their 5-year forward 12-month P/E range, suggesting that the market is no longer willing to assign high multiple to these type of GARPy SaaS names. INTU is trading at around 27x forward P/E, around the same as CRM, while ADSK offers a slight discount at 25.7x. ADBE, which is trading at 20.6x, offers the largest discount in the peer group, although we believe this reflects the company’s challenging competitive environment, which we recently published on.

Risks

One aspect that raises concern is the company’s intense emphasis on cost containment and margin enhancement. This hardline approach could potentially compromise growth and destabilize the corporate environment. The resulting potential shake-up and employee dissatisfaction could create obstacles for growth, especially when compounded by broader economic circumstances.

The competitive landscape in the realm of AI is another risk element. With rivals like OpenAI and Microsoft (MSFT), along with a multitude of innovative startups aiming to redefine the industry, the stakes are high. If these competitors manage to devise superior customer service chatbots or create chatbots trained on client data, Salesforce could see its grip on the CRM sector loosen. Compounding this is Salesforce’s decision to dissolve its M&A team, which could curtail its ability to snap up promising AI startups, thereby intensifying competitive strain.

Salesforce’s exposure to the economic climate represents another considerable risk. In our estimation, this constitutes the most significant near-term threat to Salesforce’s stock. The company has already witnessed shifts in customer purchasing patterns, including protracted sales cycles, additional layers of deal approval, intensified budget scrutiny, and deal size reduction in Q2 2023. This trend persisted as 2023 advanced. Salesforce’s Marketing and Commerce Cloud sectors are particularly susceptible to macroeconomic swings.

Conclusion

Salesforce’s World Tour NYC was a testament to its commitment to AI and data-driven solutions, highlighting the potential of Einstein GPT and Genie to revolutionize the CRM space. The event underscored Salesforce’s strategic move towards becoming a data-driven enterprise and the potential that lies within the integration of AI and data to provide unparalleled customer service.

However, the unveiling of these AI capabilities also puts Salesforce squarely in the crosshairs of a fiercely competitive AI landscape. With formidable competitors like Microsoft and OpenAI, along with the burgeoning AI startup scene, Salesforce will have to continuously innovate and differentiate its offerings to maintain its market lead.

Adding to this is the specter of economic uncertainty, which could potentially disrupt customer purchasing patterns and impact Salesforce’s growth. Despite these challenges, the World Tour NYC has reinvigorated our interest in Salesforce’s prospects, and we are keen to see how the company navigates these hurdles.

Salesforce’s future growth will be largely dictated by how effectively it can leverage its AI capabilities, navigate the competitive landscape, and weather potential economic downturns. As we continue our watch on Salesforce, we remain cognizant of these challenges and opportunities, and look forward to providing our readers with insightful, data-driven analysis to inform their investment decisions.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within 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.

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