Salesforce Shares Plunge 6% Despite Strong Earnings, as AI Looms Large

TradingKey - On Wednesday, September 3, Salesforce (CRM), a leader in customer relationship management software, released its Q2 earnings for fiscal year 2026. The company reported double-digit growth in both revenue and earnings, surpassing expectations. Yet, a weak revenue outlook for the current quarter sent the stock tumbling 6% in after-hours trading.

Before this latest earnings report, Salesforce's stock had already fallen 23% this year, ranking nearly last among Dow Jones index components, outperforming only one other stock. It also lagged behind all major tech stocks.

The financial results showed that Salesforce's revenue grew nearly 10% in the second quarter, marking an improvement over the previous five quarters. Earnings per share (EPS) grew nearly 14% year-over-year, more than double the growth rate of the previous quarter, and significantly above expectations.

Salesforce CEO Marc Benioff stated that due to the strong performance in the first half of fiscal year 2026, the company is on track to set a record with nearly $150 billion in operating cash flow this fiscal year.

However, the forward guidance suggests that this growth momentum might not persist. Salesforce's guidance for Q3 revenue indicates year-over-year growth of 8% to 9%, reaching between $10.24 billion and $10.29 billion, just barely meeting the expected $10.29 billion. This implies a slowdown from Q2's growth rate.

Furthermore, the full-year revenue guidance is for year-over-year growth of 8.5% to 9%, reaching $41.1 billion to $41.3 billion. This is only a slight upward revision from the previous guidance of $41.0 billion to $41.3 billion.

Analysts believe Salesforce is facing its most severe growth challenges. Before 2023, the company maintained an annual revenue growth rate of at least 24%, but since mid-2024, this figure has been stuck in the single digits. The market expects it might not return to double-digit growth until fiscal 2029.

Stifled Growth: A Victim of the AI Wave?

Salesforce's sluggish growth aligns with the natural progression of software companies transitioning from high-growth to mature stages. However, it also reflects Salesforce's struggles to capitalize on the current AI boom.

KeyBanc Capital Markets highlights the threat AI poses to software companies like Salesforce. AI-generated code can create new features and applications, potentially disrupting Salesforce's existing software business. Additionally, AI could reduce corporate staffing needs, undermining Salesforce's user-seat-based pricing model.

Salesforce previously launched the new Agentforce AI platform, integrating AI agents into its CRM software to assist with complex tasks. The caveat is that the potential risks of new tools often make companies cautious in deployment, possibly slowing market adoption of the product.

Nevertheless, some analysts remain optimistic about Salesforce's AI journey. CNBC analyst Jeff Marks noted that since its launch three quarters ago, the AI product has completed over 12,500 transactions, with more than 6,000 paid. The product has also won important clients this quarter, including Dell Technologies, FedEx, Marriott, Anthropic, and Reddit.

In this quarter, the annual recurring revenue from the "Data Cloud and AI" category, which includes Agentforce AI, reached $1.2 billion, a 120% year-over-year increase. This indicates Salesforce's AI products are not as poorly received by the market as previously thought.

Despite the potential for this AI tool to become a growth engine, some analysts warn of a bigger long-term concern: AI-native competitors might disrupt existing cloud software companies, similar to how cloud computing once overturned traditional software industries.

Following the earnings report, JP Morgan lowered its price target for Salesforce from $380 to $365. Barclays and Citizens JMP maintained their "buy" ratings, while UBS kept its "hold" rating.

Jeff Marks advises that Salesforce's upcoming annual Dreamforce tech conference in mid-October in San Francisco could shift the market's pessimistic view of the company. Last year's event helped lift the company's stock back to historic highs.