After Earnings, Is Salesforce Stock a Buy, a Sell, or Fairly Valued?

Salesforce CRM released its first-quarter earnings report on May 28. Here’s Morningstar’s take on Salesforce’s earnings and stock.

Key Morningstar Metrics for Salesforce

• Fair Value Estimate: $325.00
• Morningstar Rating: ★★★★
• Economic Moat: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Salesforce’s Q1 Earnings

Salesforce reported results for its fiscal first quarter that were ahead of the top end of guidance. Revenue growth of 8%, both as reported and in constant currency, to $9.83 billion was driven primarily by strength in data cloud, while non-GAAP operating margin was 32.3%.

Why it matters: Both subscriptions and services were ahead of our model, with Agentforce and data cloud providing notable strength during the quarter. We see solid results around the world and note management’s positive remarks on strength in small business customers.

• Multicloud deals continue to perform well, with more than half the top 100 deals in the quarter including six or more clouds. Almost 60% of the top 100 deals include both data cloud and artificial intelligence.
• Salesforce has closed more than 8,000 Agentforce deals so far, half which are paid. Agentforce is generating $100 million in annually recurring revenue, which is impressive given the solution has been available for just two full quarters.

The bottom line: We are raising our fair value estimate to $325 per share from $315 and see shares as attractive. Based on results and guidance that skew positive, we nudged our near-term estimates slightly higher while holding our long-term model in check.

• Management offered broad commentary on the Informatica deal, announced yesterday, noting the importance of the firm’s data integration tools in the AI age and recommitted to both its capital allocation strategy and margin targets.

Coming up: Management raised guidance for the full-year beyond quarterly upside, including an assist from improving currency impacts. Given product momentum, we see potential for results that track even better throughout the year.

• Guidance for fiscal 2026 includes revenue of $41.0 billion-$41.3 billion, up from $40.5 billion-$40.9 billion, with non-GAAP operating margin unchanged at 34%. Second-quarter guidance was better than we were modeling on both the top and bottom lines.

Fair Value Estimate for Salesforce

With its 4-star rating, we believe Salesforce’s stock is undervalued compared with our long-term fair value estimate of $325 per share, which implies a fiscal 2026 enterprise value/sales multiple of 7 times, adjusted price/earnings multiple of 29 times, and a 4% free cash flow yield.

We model a five-year compound annual growth rate, or CAGR, for total revenue of 8% through fiscal 2030, which we think will be driven by solid growth in all clouds, with most notable strength coming from the data cloud. Our revenue forecast assumes modest revenue acceleration after depressed growth in both fiscal 2023 and 2024. We forecast non-GAAP operating margin expanding from 31% in fiscal 2024 (actual) to the upper 30% area in fiscal 2030, which we think is consistent with management’s new profitability focus.

Read more about Salesforce’s fair value estimate.

Economic Moat Rating

For Salesforce overall, we assign a wide economic moat, arising primarily from switching costs, with the network effect serving as a secondary moat source. Based on the company’s product lines, we believe Sales Cloud, Service Cloud, and Salesforce Platform and other have earned wide moats, while Salesforce, Marketing and Commerce Cloud, and Data Cloud have carved out narrow moats. While services, which is a small portion of revenue, help facilitate software sales and contribute to customer relationships, we do not think the company’s professional services business would warrant a moat on a stand-alone basis. We believe Salesforce’s moat will probably allow the company to earn returns in excess of its cost of capital over the next 20 years.

Read more about Salesforce’s economic moat.

Financial Strength

We believe Salesforce is a financially sound company. Revenue growth is reflective of a mature large-cap software company, while margins continue to expand. As of January 2025, Salesforce had $14.0 billion in cash and investments, offset by $8.4 billion in debt, mostly related to the Slack acquisition, resulting in a solid net cash position. Gross leverage sits at 0.7 times trailing non-GAAP EBITDA, which we do not view as problematic given that we expect the company’s strong and expanding free cash flow generation.

Operating margins continue to expand as Salesforce focuses on profitable growth. Management expects continued expansion of non-GAAP operating margins over the next several years. Further, Salesforce generated free cash flow margins in excess of 20% in each of the last three years, including 33% in fiscal 2024. We believe that margins should ultimately exceed 30% as growth slows and we appreciate management’s more balanced approach between growth and margins. We think this level of free cash flow generation should contribute to a muscular balance sheet for years to come.

Read more about Salesforce’s financial strength.

Risk and Uncertainty

We assign Salesforce an Uncertainty Rating of High. From a big-picture perspective, we believe CEO Marc Benioff will be difficult to replace, as he pioneered the software industry, co-founded the company, and led it to be a dominant force with a broad portfolio of sales and marketing related solutions.

We believe the most important metric for Salesforce investors is revenue growth. Therefore, continued deceleration in the Sales Cloud, or growth that does not materialize as expected in the Service, Marketing, and Commerce Clouds or the Salesforce Platform would likely have an adverse impact on the stock, in our view.

To help drive growth, Salesforce has also been acquisitive. While we do not believe acquisitions have been transformative, the company has certainly executed some larger transactions in order to help establish an immediate or larger presence with a particular solution. Investors have been concerned at times about rich valuations and organic growth prospects, as was the case with the Slack, Tableau, and Mulesoft acquisitions over the last several years. We believe the company is likely to continue to make acquisitions but has pulled back from larger deals. In these situations, valuation and integration will remain risks.

Read more about Salesforce’s risk and uncertainty.

CRM Bulls Say

• Salesforce dominates salesforce automation, but it only controls 30% of a highly fragmented market that continues to grow double digits each year, suggesting there is still room to run.
• The company has added legs to its overall growth story, including customer service, marketing automation, e-commerce, analytics, and artificial intelligence.
• Management is likely going to focus on expanding margins after years of subscale profitability.

CRM Bears Say

• As the company expands, it may be increasingly difficult for Salesforce to grow faster than its various end markets.
• Salesforce has entered new areas via acquisition and has arguably paid material premiums in the process. Integration risk is real, as is the risk of increasingly large, dilutive, or ill-conceived deals.
• The company’s generative AI strategy has been a series of fits and starts and while Agentforce looks promising, it may be just another iteration in an evolving approach.

This article was compiled by Jacqueline Walker.