CRM - Salesforce Is Undervalued Despite A Democratizing AI Market
2024-06-06 01:13:39 ET
Summary
- Salesforce stock dropped ~20% after Q1 fiscal 2025 earnings, missing revenue expectations by ~$14 million. The negative sentiment was in anticipation of future growth challenges, but largely unwarranted.
- Salesforce may face a future economy with highly democratized AI systems. This deflationary trend, also driven by mainstream robotics, may impact demand for Salesforce's current AI pricing in ~15 years.
- Despite risks, Salesforce remains a strong investment for the next decade. My conservative DCF model shows the company is roughly 20% undervalued. I reiterate my Buy rating.
Salesforce Dropped 20% After Q1 Earnings
I covered Salesforce ( CRM ) for the first time in February, and I put out a Buy rating, even though I warned of the valuation risk and mentioned that a smaller allocation might be wiser due to potential volatility in AI stocks to come. Now, after Q1 fiscal 2025 earnings , the stock has dropped ~20% in price. The company missed its revenue estimate by $13.38 million; even though revenue for the period increased 11% YoY and free cash flow was up 43% YoY, investors did not take kindly to the indicated revenue growth contraction. I think this reaction to Salesforce's quarterly results is unwarranted, although I do believe that the sentiment that Salesforce could be entering a period of slower growth due to macroeconomic stagnation in many core markets is accurate. In essence, this might be a buying opportunity. David Friedberg mentioned an interesting point in the most recent All-In Podcast, released on Friday, 31st May, that there could be a commoditization of AI underway, which significantly devalues the status of what Salesforce is offering when consumers can get generative AI solutions for a much cheaper and democratized price. There are many companies already developing the tools to make business solutions using AI at a greatly reduced price. In some respects, this significantly reduces some of the value that Salesforce could have in the market long-term. That being said, I think the stock has much more life in it, and I believe that the company's management will be able to strategically readjust in offering new services that fulfil cheaper demand. The commoditization of AI could be "the beginning of the end" for Salesforce if it doesn't readjust, but I don't believe the end is anywhere near yet. In the same podcast episode, David Sacks mentioned how CEO Marc Benioff adopts an agile approach to running Salesforce, which could be favorable for the company if it manages to again adapt to the changing market dynamics; I think it will, even if Salesforce is in the second half of its life as a business....
Salesforce Is Undervalued Despite A Democratizing AI Market