The Dilemma of the Software Giant: Has Salesforce Fallen Behind in the AI Race?

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As the wave of artificial intelligence sweeps the globe, former software industry darling Salesforce is facing a severe test.

Since the beginning of this year, Salesforce’s stock has fallen 24%, making it one of the 30 worst-performing stocks in the S&P 500. This stands in sharp contrast to the more than 150% combined surge in the previous two years, amounting to a dramatic market reversal.

This decline is particularly striking among software giants, as companies like Microsoft, Oracle, and Palantir Technologies—considered to have stronger AI advantages—see strong stock performances. Although Salesforce has launched its own AI products, market doubts about its long-term trajectory may lead to its stock remaining under pressure even if it reports strong quarterly results.

The core of the debate among investors is, when it comes to artificial intelligence, is it a tailwind for Salesforce’s growth, or a headwind disrupting its business model? The earnings report to be released after the close on Wednesday will provide the latest—and potentially most crucial—data for this debate.

Growth Prospects Under Pressure

According to market forecasts, Salesforce’s revenue for the second quarter of this fiscal year is expected to increase by nearly 9% year-on-year, and net profit by 23%. While this may be the company’s fastest sales expansion in more than a year, revenue growth will still be below 10% for the fifth consecutive quarter—a phenomenon not seen in nearly two decades. Additionally, forecasts show the company may not return to double-digit annual revenue growth until fiscal year 2029.

Salesforce is actively deploying in AI, with its Agentforce AI platform showing a certain degree of appeal. The company’s $8 billion acquisition of data management software company Informatica Inc. is also seen as a key part of its AI strategy. However, investors are not yet convinced these moves can offset the potential threats AI brings.

According to KeyBanc Capital Markets analysis, the software industry faces a triple threat from AI, and Salesforce is exposed to two of these risks: First, AI’s ability to write code might replace some of its features and app development; second, AI might cause companies to downsize staff, thereby reducing demand for Salesforce’s “per seat” pricing model.

Salesforce is not the only traditional software company in difficulty. Long-standing leaders like Adobe are also struggling this year, as concerns rise that their growth will be disrupted by AI-native competitors.

Analysts Question and Confidence Wavers

Some analysts’ views have intensified market pessimism. Rishi Jaluria, Managing Director of Software Equity Research at RBC Capital Markets, downgraded Salesforce’s rating earlier this year, after having been long-term bullish on the stock.

“There’s a lot of hype around Agentforce, but its revenue numbers have always fallen short of expectations, which is disappointing, especially for a company of this size,” Jaluria said:

“There are real doubts over its technical maturity and whether it can deliver on its promises, especially considering that future AI competitors will only increase. Unless Agentforce becomes a ‘must-have’ for clients, I worry growth will continue to slow.”

Jake Seltz, fund manager for the Allspring LT Large Growth ETF, which holds Salesforce shares, also believes, “I do not expect AI to make a significant contribution to Salesforce over the next few quarters. Meanwhile, the market is very concerned that AI will disrupt and replace traditional software companies.” He added:

“I’m optimistic it’ll eventually become a winner, but that might take several years. For now, the market is more interested in companies that are already benefiting from it.”

Low Valuation as a Glimmer of Hope

Of course, the sharp drop in share price also means market expectations are at a low point, creating conditions for Salesforce to deliver positive surprises. Analysts’ average 12-month price target for the stock is about $336, implying more than 30% upside potential.

In terms of valuation, Salesforce’s stock also appears to have room to rise. Its forward price-to-earnings ratio is just 21, near a historic low and well below its long-term average. In addition, Bloomberg’s analysis of hedge fund 13F filings shows Starboard Value increased its holdings of Salesforce by more than 400,000 shares as of June 30, indicating some institutional confidence.

Nevertheless, the company’s prospects may ultimately still depend on AI. If it cannot prove itself a major player in this tech boom, a cheap valuation will mean little in many respects. As RBC’s Jaluria put it:

“As long as our visibility into AI-driven growth remains limited, its valuation multiples will continue to decline. Even if it’s not expensive now, it will be hard to have confidence in buying immediately if growth continues to slow.”

Risk Warning and DisclaimerThe market carries risks, and investments need to be made with caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions from this article are suitable for their particular circumstances. Investing based on this article is at your own risk. ```