Salesforce raises guidance but sees pressure as customers rein in spending

Salesforce shares are under pressure after the company saw it's slowest pace of growth in 13 years. RBC Capital Markets Software Equity Analyst Rishi Jaluria breaks down the future what lies for the software giant.

Video transcript

- Well, taking a look at shares of Salesforce. Under pressure today after the software company saw its slowest pace of growth in 13 years as cloud spending took a hit amid economic uncertainty. Despite an 11% rise in revenue year over year, its 36% jump in capital expenditures took the spotlight.

Rishi Jaluria, RBC Capital Markets software equity analyst joins us now for a deeper dive into those earnings. Good to see you here, Rishi. So do you think the stock is being unfairly punished at the moment based on this earnings report and the guidance?

RISHI JALURIA: Yeah, and great to be here. Thanks so much for having me. Look, I think this was a pretty down-the-line type of quarter. We saw some upside on margins, and they raised their margins guidance for the year and talked a good game on profitability and generative AI. And we can definitely talk about the generative AI initiatives. I think there's some exciting stuff there.

But growth came in a little bit soft. It did beat consensus by a very narrow margin. They're talking about 10% growth in backlog looking forward to next quarter, and so I think there's just some fears of macro slowdown hitting this.

I would also point out the stock was up more than 65% since the beginning of the year, so I'm not surprised that any signs of softness against this high bar could lead to a little bit of profit taking. So I wouldn't necessarily say this is unfairly punished, given the outperformance of the stock so far this year.

- And that context certainly important given where it's been so far this year. Do you want to talk about AI? Obviously, we knew that was coming up on a lot of earnings calls. Not seeing Salesforce benefit as much as some of these other AI darlings. Talk about why they're not really seeing that same sort of bump?

RISHI JALURIA: Yeah, I think it's because we still need to see their strategy fleshed out. With Microsoft, it's very obvious, and they have obviously the OpenAI investment and a ton of product investments. You also have a lot of investors that are looking for quote, "pure play," AI plays. And unfortunately, sometimes they're investing in companies that aren't really AI companies like Palantir, which has doubled over the past month and is not an AI company in our view.

Salesforce, we think, can be a beneficiary of this. They have the relationships. They have the data. There are a lot of use cases. And I really like what Mark Benioff was talking about on the call yesterday in terms of new-use cases in terms of the GPT trust layer. And they are actually going to hold a separate user conference and day around AI in about two weeks' time frame, so I look forward to learning a lot more.

But I think Salesforce is well positioned to benefit from this, and if we like their strategy and the products are resonating with customers, we do think there could be additional upside, potentially, if they have the right strategy, the right product market fit.

- So what do you think investors will really be looking for then when it comes to AI strategy? Sort of putting some meat on the bones, if you will. What do you think they're going to be looking for that's really going to help them get a sense of how Salesforce is going to be positioned with this AI space?

RISHI JALURIA: I think there's three things that any investor should be looking for when they're thinking about, is this company really going to benefit from generative AI or not, and do they have the right strategy or not?

I think number one is, what exactly are they doing with generative AI? What is the actual product? Is it just paying lip service to the technology, or are they actually re-architecting their solutions around what is transformational technology like the cloud was 10, 15 years ago?

Number two, is this something that customers find a lot of value in? I think that's really important. And number three, and this is the one that's maybe the most uncertain but obviously the most important, is monetization. Is this something that the company can actually charge for? Can they get additional revenue streams beyond what they're currently getting from having generative AI, or does it become table stakes, and it's something that you have to have and you can't actually charge for it?

So I think if Salesforce can check off the boxes on all three of those things, then I think that puts them in a good position to benefit.

- And in terms of leadership, this sort of digital transformation that Salesforce is perhaps going to be going into, is Marc Benioff still the best person to be in that position to really lead that next stage of digital transformation?

RISHI JALURIA: I think that's the one that gets debated a lot, and there's a lot of conversations around succession planning. I think right now, Salesforce is at a very pivotal time in its history, where it is transforming to being more of a profitable company that shows margin expansion while still having healthy growth.

There's a lot of changes and go to market and product that we're seeing. And so I think right now, a company like Salesforce needs that kind of steady hand at the wheel, so to speak, rather than making management changes. So I do think Marc is the right person to have in charge of the company at this time.

If we're looking out 10 years, should there be some level of succession planning? Potentially. We've seen, obviously, that that's gone well for companies like Microsoft and Adobe and others that have had good succession planning. But I think for right now, as this is such a pivotal time in Salesforce history, I think it's really important to have Marc Benioff go navigate Salesforce through this.

- As you mentioned there, that steady hand needed, especially as we still don't really all the expansive uses of generative AI and how these companies will use them. Thank you for joining me this morning, Rishi Jaluria--

RISHI JALURIA: Thank you.

- Capital Markets software equity analyst. Thanks so much.