The news
On May 29, 2024, Salesforce reported its results for the first quarter of the fiscal year 2025. Highlights are
- a total quarterly revenue of $9.133bn US, resembling a year-over-year growth of 11 percent
- a current remaining performance obligation of $26.4bn US
- a remaining performance obligation of $53.9B US
- an operating margin of 18.7 percent.
- diluted earnings per share of $1.56
The company reported a revenue guidance of $9.2bn - $9.25bn US for the next quarter and a full year guidance of $37.7bn - $38.0bn US, resembling growth rates of 7 – 8 percent and 8 – 9 percent, respectively.
With these numbers, Salesforce ended up at the lower end of last quarter’s guidance on the revenue growth side while exceeding the earnings per share projection and slightly lowered the guidance for the fiscal year 2025.
The result: The company’s share price dropped from $272 to bottom out at $212.
The bigger picture
Salesforce is the big gorilla in the CRM and CX industry. The company has surpassed SAP as the biggest business software vendor in the last 18 months. This is largely thanks to the extraordinary growth that Salesforce showed in the past years and secondly because of SAP’s still ongoing transition from an on-premises vendor to become a cloud vendor.
All three, Microsoft, Oracle, and SAP report a higher cloud application growth.
But then, the big games in town are generative AI and infrastructure. All of these companies, including Salesforce, are investing heavily in their own artificial intelligence capabilities in a race to provide superior business applications. Plus, several other ones, including Google and, specialist vendors. Google also eyes Hubspot, which could bring the company a foot in the business applications market, too. Oracle has a great game going on with its AI database.
Re IaaS, Microsoft, Google, and Oracle have an edge, even SAP has more of an infrastructure play than Salesforce.
And then, the titans Microsoft, Oracle, Salesforce and SAP are continuously fighting their way downmarket while defending their enterprise market positions. There are many smaller vendors that attack these four titans from below. These smaller vendors often have a pricing structure that is more conducive to smaller businesses and are not so much perceived as a threat just because of the mere size difference.
My point of view and analysis
Let’s start with the obvious. While Salesforce’s Q1/2025 numbers aren’t stellar, a valuation drop of twenty(!) percent following these numbers is just ridiculous. It basically shows that either the valuation (AI) models of finance investors are overvaluing Salesforce by far, there is too much automation in their buying/selling processes – or they smoke funny stuff. After all, finance investors have forced Salesforce to abandon its 25-year strategy of buying growth, on cost of margin. Now there is margin and slower growth, as the investors wanted it to have.
Surely, Salesforce reduced its guidance and, for the first time in a long time, looks at single digit growth. Again, this doesn’t warrant this steep drop. See above.
From a solution point of view, Salesforce is positioned quite well in the CX market. The company has established itself as the undisputed market leader, especially for bigger companies. With Salesforce Starter and Pro, it has further established a credible motion into the small business market – although I am still in doubt about perceptions. Many smaller or mid-sized companies that I work with or speak to have concerns about the difference in sizes. They do not want to be mere numbers and fear that they are not treated eye-to-eye. Whether this fear is justified or not, it is real.
Salesforce successfully positioned itself as a platform vendor, which is quite remarkable, considering where the company started. It is working on being regarded as a data and AI player.
There are some more challenges. The first and most top-of-mind challenge these days, is AI, or rather data. That Salesforce sees this challenge, too, is shown by the recent attempt at acquiring Informatica. The challenge is not necessarily about cleanliness of data, but about its availability. And, in contrast to SAP, Microsoft, Oracle, Google, its access to business relevant data is quite limited. This basically limits the power of own models and hence, of the overall Einstein architecture. Unless Salesforce or Salesforce customers purchase the access to this data or provide a stable connection to other business systems – which still limits the amount of data available. As a reference, SAP claims that eighty (80!) percent of all business transactions at one point or another run through an SAP system and that more than 26,000 customers have already consented to their data being used to train SAP’s AIs. Microsoft has software covering much of the corporate value chain, OpenAI and significant business transaction data, too. Oracle’s business applications cover the business value chain, it has its cloud database engine and with that serious access to data of different kinds as well. These are serious advantages.
The other advantage they have, is IaaS. Salesforce is not an IaaS player. While the company operates own data centers, it heavily relies on AWS as its infrastructure provider. This not only limits its ability to get to additional data via workloads but creates a strategic dependency. As long as AWS does not significantly enter the business applications market, this is not a major issue.
All in all, Salesforce seems to be in big company growth territory. The company has some challenges to address, it is by no means invincible. Still, it is doing the right thing, mostly.
Well done, Salesforce!
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