Salesforce (NYSE:CRM) is a beaten-down US stock that warrants serious consideration this October. Despite delivering strong AI-driven results in its latest quarterly report, the stock was punished by the market. This, however, appears to be a short-term reaction rather than a deeper understanding of long-term fundamentals.
Let’s explore why Salesforce continues to be one of my top picks.
Valuation is undemanding
From a pure valuation perspective, Salesforce’s forward price-to-earnings (P/E) stands at 21.56, 16% below the sector median and 44% below its five-year average. Similarly, the enterprise value-to-EBITDA ratio is 14, slightly below the sector’s 15.61 median.
Price-to-sales and price-to-cash-flow ratios also show notable discounts versus historical averages. This suggests the stock is materially undervalued relative to both its sector peers and its own history.
Looking beyond the near term, the P/E ratio falls to 15.1 times by 2029, based on current consensus forecasts. The P/E-to-growth (PEG) ratio is 1.2. That’s a 33% discount to the sector average.
The company also enjoys a modest net cash position.
Overlooked by the market
So, why is Salesforce so cheap compared to the sector? Well, one issue concerns the company’s traditional enterprise technology market, which has shown signs of maturity in recent years.
The disconnect also appears to stem from the market reaction to Q2 earnings. Salesforce reported $10.25bn in revenue, a 10% year-over-year increase, narrowly beating expectations by $100m.
While overall revenue growth might seem modest, a deeper look reveals that the company is monetising its AI strategy very effectively, potentially more so than any of its peers.
Salesforce’s Agentforce platform now manages 1.5m support chats at a 77% resolution rate, enabling clients like Reddit to reduce resolution times from 8.9 minutes to just 1.4 minutes. This represents a huge productivity gain that can be passed out across its huge CRM customer base.
AI-driven automation has allowed Salesforce customers to cut support headcount by 40% while maintaining satisfaction. This is proof that agentic AI can scale in a real-world enterprise setting. It’s practicing what it preaches.
What’s more, by leveraging as much as 300 petabytes of customer data, Salesforce is building what can be described as an operating system for the agentic enterprise.
While the market fixates on a modest revenue growth guidance, Salesforce is quietly creating a sustainable competitive moat. It already claims to be the world’s no.1 AI CRM.
Moreover, margin expansion is also underway with operating margins reaching 34% in Q2, up 60 basis points year-over-year and 200 basis points sequentially.
The bottom line
Ok, there are absolutely risks. Long-term growth will be powered by agentic AI sales, but this is a market where other players, including Microsoft, are likely to be very active. If Salesforce can’t gain much market share, then, of course, we could see sales revised downwards and the stock pull back.
However, in short, I believe Salesforce can be a market leader in agentic AI for enterprise software with the potential for durable revenue growth and margin expansion. Current valuation discounts suggest the stock is absolutely worthy of consideration.
