Salesforce

Salesforce delivered a solid fiscal second quarter, with contracted demand and paid artificial intelligence adoption providing the most encouraging signals. Revenue of $11.35 billion increased 11% year over year and landed near the high end of management’s guidance.

Why it matters: The quarter strengthens our confidence that Salesforce can produce modest organic growth acceleration during the second half, and that the firm's AI monetization is becoming more credible. Agentforce ARR exceeded $1.5 billion, combined Agentforce and Data 360 ARR approached $3.9 billion, and Agentic Work Units nearly doubled sequentially. Salesforce added 2,000 paying production customers, and half of Agentforce bookings came from customers replenishing consumed Flex Credits. Overall these datapoints broadly support that growth remains healthy and some customers are moving beyond pilots for newer products. Salesforce did expand the Agentforce ARR definition to include Slackbot and Headless 360 this quarter, limiting comparability with prior periods.

The bottom line: We do not expect to materially change our fair value estimate of $280 per share and still view shares as modestly undervalued. We were pleased to see shares bounce materially, up 22% as of writing Aug. 27, after this quarter's results, with shares now up over 60% from the recent lows. Claudeforce, the newly announced Anthropic partnership, reinforces Salesforce’s strategy of serving as the governed data and workflow layer underneath multiple AI models and interfaces. Customers will be able to use Claude on top of Salesforce without replacing Salesforce as the system of record. This supports our decision to maintain Salesforce's moat at narrow following our software sector moat reviews, as we still liked Salesforce's infrastructure positioning, switching costs, and valuable installed customer base.

Long view: We see Salesforce increasingly positioned as a key distribution and record layer for AI, not replaced by AI.

Our fair value estimate for Salesforce is $270 per share, which implies a next-12-month adjusted price/earnings multiple of 19 times. This is below the stock's historical forward multiple because we account for the possibility that AI increases competition, changes software pricing, and pressures seat counts. We are not outright AI bears: Salesforce's system-of-record position, customer data and metadata, embedded workflows, switching costs, and distribution provide a credible path to participate in a larger pool of enterprise software spending. For reference, the GAAP forward multiple is closer to 34 times.

We model a five-year compound annual growth rate for total revenue of 9% through fiscal 2031, driven by solid but slowing growth across the core clouds and stronger growth from Data 360 and Agentforce. We forecast non-GAAP operating margin expanding from 34% in fiscal 2026 (actual) to 38% by fiscal 2031. With revenue growth of roughly 9% by fiscal 2030 and a non-GAAP operating margin of 38%, our forecast reaches a "rule of 47" outcome, modestly below management's "rule of 50" target. Achieving the target would create upside to our estimates, while greater AI-related investment or acquisition integration costs could delay margin expansion.

The key profit drivers are organic subscription growth, monetization of AI and data products, cross-selling, pricing, sales productivity, and continued expense discipline. Fiscal 2027 guidance calls for 11%-12% revenue growth, but slightly more than 3 percentage points come from Informatica; this makes the expected second-half organic reacceleration an important proof point. Agentforce and Data 360 ARR was nearly $3.9 billion in the fiscal second quarter, including $1.1 billion of Informatica Cloud ARR, while Agentforce ARR exceeded $1.5 billion under an expanded definition that includes Slackbot and Headless 360. We therefore focus on bookings, cRPO, adoption, consumption, retention, and the mix of organic versus acquired growth rather than headline ARR alone.

For Salesforce overall, we assign a narrow Morningstar Economic Moat Rating, driven primarily by switching costs, with network effects as a secondary source. We believe Sales Cloud, Service Cloud, Salesforce Platform, Marketing and Commerce Cloud, and Integration and Analytics each have narrow moats. Agentforce should help defend Salesforce’s moat from the emerging AI threat. Professional services, a small portion of revenue, supports software sales and customer relationships but would not warrant a moat on a stand-alone basis. We expect Salesforce’s moat to support returns above its cost of capital over the next 10 years, while uncertainty around AI makes having high confidence levels up to 20 years out inappropriate, in our view.

Despite the threat of AI disruption, we still think Salesforce has a moat. We believe Salesforce has elements of both the application layer and infrastructure layer to its products, operates as a system of record for clients, and often deals with complex integrations and workflows, all of which increase switching costs, giving Salesforce time to adapt its offerings to an AI world. Salesforce's huge distribution power via its current installed customer base is also a huge asset.

Customers value Salesforce’s clouds individually, but their complementarity and tight integration make the broader suite more compelling, particularly as customers seek to consolidate vendors. As customers adopt multiple clouds, Salesforce becomes more deeply embedded in their operations, reinforcing switching costs.

Software switching costs generally rise with a system’s importance, the number of organizational touch points, and the complexity of replacement. Customers must often run old and new systems in parallel, retrain employees, re-engineer processes, migrate data, and accept execution risk and lost productivity. Major implementations can require system integrators and, in difficult cases, take more than a year.

Salesforce’s approximately 92% annual customer retention is good and has gradually improved over the past 20 years. Retention is somewhat constrained by the company’s meaningful exposure to small businesses, which typically have lower retention than enterprise customers, making the 92% figure even stronger and more significant.

We believe Sales Cloud and Service Cloud, each roughly 25% of subscription revenue, have narrow moats based on switching costs. These applications are mission-critical to selling and servicing customers, contain valuable customer data, and connect with numerous back-end systems. Replacing CRM or service software is therefore costly, time-consuming, disruptive, and operationally risky. Salesforce helped pioneer SaaS CRM and remains a leader in both CRM and customer service. Despite competition from point solutions, ERP vendors, and open-source software, Salesforce has remained the dominant force in the industry, and we view its offerings as best in class, with the broader Salesforce suite strengthening its position.

We think Salesforce Platform, about 20%-25% of subscription revenue, has a narrow moat from switching costs and network effects. It includes Slack, Salesforce’s application development platform, and related solutions. Development platforms are sticky because businesses build applications and processes on them, making migration disruptive and expensive. Salesforce was also early in cloud-based low-code and no-code development, enabling easy integration with its own applications and distribution through AppExchange.

AppExchange and Salesforce’s broader developer and consulting ecosystem create network effects. Salesforce’s large customer base attracts developers, whose applications extend the platform’s functionality and make Salesforce more valuable to customers. More customers then expand the potential audience for developers, reinforcing a virtuous cycle. The large ecosystem of system integrators and consultants further strengthens this effect.

Marketing and Commerce Cloud, together about 15% of subscription revenue, have a narrow moat based on switching costs. These products span marketing automation, personalization, analytics, digital commerce, order management, and related functions. The market is competitive and more fragmented than CRM, but Salesforce is one of the leaders with a broad, tightly integrated platform. These applications are natural extensions of Salesforce’s core products and become difficult to replace once embedded in complex workflows spanning multiple systems and data repositories. Salesforce lacked a first-mover advantage here, building its position through acquisitions such as ExactTarget and Demandware as well as organic development.

We think Integration and Analytics, about 15% of subscription revenue, has a narrow moat based on switching costs. The segment includes MuleSoft, Informatica, and Tableau. These products connect disparate data sources and help unify commerce, sales, marketing, and service data. As add-ons to Salesforce’s core products, they also enhance the value and switching costs of the broader suite. Professional services, roughly 5% of revenue, do not independently warrant an economic moat.

Salesforce's leadership in CRM, large installed base, proprietary customer data and metadata, embedded workflows, and broad partner ecosystem position it to remain a key system of record and orchestration layer as enterprises deploy AI agents.

Agentforce and Data 360 are showing rapid adoption, while cRPO growth accelerated to 14% in constant currency in the fiscal second quarter of 2027, premium Agentforce bookings more than doubled sequentially.

Management has paired improving profitability with meaningful capital returns, including a $25 billion accelerated repurchase.

Headline growth is being helped by Informatica, while the mature core clouds remain exposed to slower seat growth; AI-driven productivity could reduce user counts or force a shift toward less predictable consumption and outcome-based pricing.

Competition is intensifying, and Salesforce must prove that Agentforce and its open-model partnerships create durable economics rather than allowing model vendors or lower-cost tools to capture more of the value.

Acquisition risk has returned with the acquisitions of Informatica, Fin, and Contentful.