Salesforce Borrowed $25 Billion to Buy Its Own Stock and Cut Its Cash Flow Growth Guidance in Half

Salesforce (NYSE: CRM) made one of the biggest capital-allocation decisions in software this year, and it came in two parts.

In March, the company entered a $25 billion accelerated share repurchase -- the largest such deal in history, by its own description -- funded with a $25 billion debt issuance. Then, reporting fiscal first-quarter results in late May, it told investors that fiscal 2027 operating and free-cash-flow growth would come in around 4% to 5%, half the 9% to 10% it had guided to in February, specifically to reflect the cost of that debt.

Borrowing $25 billion to buy your own stock is an aggressive move for any company. For Salesforce, which spent years funding buybacks comfortably out of its own cash flow, it marks a change in posture.

With the stock at about $196 as of this writing, roughly 27% below its 52-week high of $269.11, was the trade worth it?

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One enormous repurchase

The buyback is part of a $50 billion authorization Salesforce's board approved in February. The accelerated structure means most of the share-count reduction landed immediately: The company received an upfront delivery of 103 million shares, about 80% of the total it expects to repurchase, with final settlement expected in the fiscal third quarter.

Add it up, and Salesforce returned $27.5 billion to shareholders in a single quarter ($27.1 billion of repurchases plus $365 million in dividends). For perspective, that's more than the company generated in free cash flow over the entire prior fiscal year. Its diluted share count is now down 10% from a year ago.

The price looks defensible, too. The upfront shares were delivered against Salesforce's roughly $194 close in mid-March, near where the stock trades today, and the final tally will be set by the stock's average price over the life of the deal. Salesforce didn't buy the top. It bought after the market had already knocked the stock down by a quarter.

Slower cash flow, on purpose

The cost side is just as concrete. Salesforce generated $6.7 billion of operating cash flow in the fiscal first quarter, up only 3% year over year, and $6.6 billion of free cash flow, up 4%. The updated fiscal 2027 guidance reflects the interest burden the new debt layers onto that base.

That's a real bill. A company whose revenue is growing 11% is now guiding cash flow to grow at less than half that pace, and the gap is self-inflicted. Investors who prize steadily compounding free cash flow may not love what they see in fiscal 2027.

So, what did shareholders get for it? Diluted earnings per share rose 52% year over year to $2.42 in the fiscal first quarter -- though much of that jump came from a swing in gains on strategic investments rather than from operations. The longer-lasting effect is the share count. Every future dollar of profit is now spread across a tenth fewer shares.

The business behind the buyback

Of course, the buyback only matters if the business behind it holds up. So far, it is holding up.

Fiscal first-quarter revenue rose 13% year over year to $11.1 billion, helped by a $444 million contribution from the acquired Informatica business. Current remaining performance obligation (contracted revenue the company expects to recognize over the next 12 months) rose 14% to $33.6 billion. And management raised the midpoint of its fiscal 2027 revenue guidance, which now sits at $45.9 billion to $46.2 billion, about 11% growth.

That's a solid, unspectacular growth profile. It's also what the buyback case rests on. At about 23 times earnings, Salesforce is priced like a maturing software company, not like an AI winner. Retiring 10% of the share count at that kind of multiple is arguably a better use of money than the big acquisitions Salesforce pursued in earlier eras.

Sure, the debt spends flexibility the company used to have, and a year of 4% to 5% cash-flow growth is a cost shareholders have to live with. But the growth hit is front-loaded, and the benefit compounds -- the share count stays retired.

The market has been harsh on the stock, mostly over doubts about how fast Salesforce can grow in an AI-disrupted software industry. The buyback doesn't settle those doubts. What it does is make each remaining share a bigger claim on whatever growth Salesforce delivers, purchased at prices the company considered low. I think the arithmetic holds up. If the 11% growth does too, the trade will have been worth it.

Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Salesforce. The Motley Fool has a disclosure policy.