We’re only early in the artificial intelligence (AI) revolution but it’s already causing massive uncertainty around some S&P 500 shares.
In particular, software-as-a-service (SaaS) stocks are under pressure right now, most notably Adobe and Salesforce (NYSE:CRM). They’re down 35% and 31%, respectively, since December.
While I haven’t been following Adobe enough lately to comment, I think Salesforce stock appears undervalued. Let’s take a closer look at why it’s struggling.
AI-related jitters
With a market cap of $235bn, Salesforce is already a software giant. Indeed, only two FTSE 100 firms — HSBC and AstraZeneca — are larger by market cap (and there’s not much in it).
The company provides cloud-based software that helps more than 150,000 customers worldwide manage customer relationships across sales, marketing, commerce, and more.
Two newer offerings include Data Cloud, which helps companies unify their data into a single source, and Agentforce. The latter is a platform for building and deploying autonomous AI agents.
Unlike a chatbot that just answers questions, these AI agents can independently do things like qualify a sales lead, resolve a customer enquiry, or book a meeting. Through AI agents, Salesforce aims to accelerate a shift toward limitless digital labour.
Practising what it preaches, the company has been cut 4,000 jobs in its own customer support through Agentforce.
But hang on a minute. If customers use Salesforce’s AI agents to improve efficiency and reduce headcount, might the company see less overall revenue from its core business?
Or put another way, if an AI agent can handle 30%-50% of routine sales or service tasks, a company might need fewer people logging into Salesforce each day. And it largely charges per seat.
This is the AI cannibalisation risk that investors are worried about for some SaaS companies.
Strong numbers
For now though, this threat is merely hypothetical. In Q2, revenue increased 10% to $10.2bn while adjusted earnings per share grew 14% to $2.91. Both figures were ahead of market expectations.
Agentforce has landed over 12,500 deals (6,000 paid) since launch less than 12 months ago, with more than 40% of bookings coming from existing customers.
Meanwhile, Salesforce’s Data Cloud and AI annual recurring revenue has now surpassed $1.2bn, making these the firm’s fastest growing new products ever. Recent customer wins include Reddit and Indeed (the world’s largest job search platform).
Another long-time customer, Pandora, has rolled out an Agentforce-powered assistant named Gemma that now handles nearly one-third of basic customer support cases.
Salesforce is monetising the value Agentforce creates through a consumption-based pricing model called Flex Credits. Crucially, this ensures that Salesforce gets paid for the productivity its AI agents are creating, even if they’re reducing the need for human employees.
My Foolish takeaway
Over time, I think Salesforce will provide such value that it will maintain its close relationship with key blue-chip customers.
For the full year, it’s guiding for $15bn in operating cash flow, which would translate into a healthy 36% margin. And it has a net cash position of roughly $7bn.
Finally, Salesforce has expanded its share buyback authorisation by $20bn, bringing the total to $50bn. This is good to see because the software stock is currently good value, trading on a forward price-to-earnings (P/E) ratio of 22.
On balance, I think the 31% dip makes this stock well worth considering.
