Quick overview

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Salesforce’s most recent quarterly report was a mixed bag for the cloud software giant, which has long been a predictor of enterprise tech spending. The company’s forward guidance revealed slow growth, highlighting the difficulties of navigating an AI-driven market upheaval, though profits and revenue easily exceeded Wall Street’s expectations.

Shares fell during after-hours trading in response to investor concerns that Salesforce’s foray into artificial intelligence isn’t boosting revenue as quickly as anticipated. Salesforce’s stock has lagged, down 23% as of Wednesday’s close, in a year when its tech peers have soared on the AI.

This serves as a sobering reminder that even well-established companies are susceptible to disruption narratives. The results, which were made public on Wednesday after the bell, show a business that is changing. On the earnings call, CEO Marc Benioff, ever the evangelist, exuded optimism and proclaimed that this was “the most transformative time in our industry ever.”.

However, the data presents a more cautious picture, with AI promises clashing with enterprise adoption cycles and competitive pressures. Despite economic challenges, Salesforce demonstrated resilience in its fiscal second quarter, which concluded in July. According to LSEG data, revenue increased 10% year over year to $10.24 billion, exceeding the $10.14 billion analysts had projected. At $2.91 per share, adjusted earnings were significantly higher than the $2.78 consensus estimate. Net income increased from $1.43 billion to $1.89 billion, or $1.96 per share, in the previous year.

This cautious perspective comes as Wall Street struggles with the “AI disruption narrative,” as analyst Keith Weiss of Morgan Stanley so eloquently put it. Existential concerns confront established SaaS providers like Salesforce, which bills users for tools that automate marketing, sales, and customer support duties. Will some of these tasks become obsolete due to generative AI, reducing customer workforces and, consequently, subscription revenue?

New AI startups that aren’t constrained by outdated systems are catching up and offering more intelligent, flexible alternatives. Investors may need to interpret qualitative updates on AI traction and wait for renewed vigor at next month’s Dreamforce conference, according to a post-earnings note from Barclays analyst Raimo Lenschow. In fact, according to Jefferies analysts who keep a buy rating despite the optimism, the stock’s 4 to 5 percent decline during extended trading—closing the day at $256.45—pushed its enterprise value-to-free cash flow ratio to a ten-year low.