Salesforcereleased its second-quarter earnings report on Aug. 26. Here’s Morningstar’s take on Salesforce’s earnings and stock.
- Fair Value Estimate
: $280.00 - Morningstar Rating
: ★★★ - Morningstar Economic Moat Rating
: Narrow - Morningstar Uncertainty Rating
: High
Salesforce delivered a solid 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 data points 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.
The following are excerpts from Morningstar’s company report on Salesforce stock.
With its 3-star rating, we believe Salesforce’s stock is fairly valued compared with our long-term fair value estimate of $280, which implies a fiscal 2027 enterprise value/sales multiple of 6 times, adjusted price/earnings multiple of 21 times, and a 5% free cash flow yield. We model a five-year compound annual growth rate for total revenue of 9% through fiscal 2031, which we think will be driven by solid but slowing growth in all clouds, with the most notable strength coming from the data cloud in support of AI. Our revenue forecast assumes modest revenue acceleration after depressed growth in both fiscal 2023 and 2024. We forecast non-GAAP operating margin expanding from 34% in fiscal 2026 (actual) to the upper 30% area in fiscal 2031. We note our estimates are meaningfully below management’s longer-term framework as we wrestle with AI uncertainty.
Read more about Salesforce’s fair value estimate.
For Salesforce overall, we assign a narrow moat, driven primarily by switching costs, with network effect serving as a secondary moat source. Based on the firm’s product lines, we believe that Sales Cloud, Service Cloud, Salesforce Platform, Marketing and Commerce Cloud, and Integration and Analytics each have a narrow moat. Agentforce should help defend the company’s moat from the emerging AI threat. While services, which is a small portion of revenue, help facilitate software sales and contribute to customer relationships, we do not think the company’s professional services business would warrant a moat on a stand-alone basis.
We believe Salesforce’s moat will probably allow the company to earn returns above its cost of capital over the next 10 years. Given the unknowns surrounding what impact AI will have on many software companies, we think it is inappropriate to assign a “near certainty” level of confidence to the return profile over the next decade.
Read more about Salesforce’s economic moat.
We believe Salesforce is financially sound. Revenue growth reflects a mature large-cap software company, while margins continue to expand. As of January 2026, Salesforce had $9.6 billion in cash and investments, offset by $14.4 billion in debt, mostly related to the Slack and Informatica acquisitions, resulting in a net debt position for the first time in many years. Gross leverage sits at 1 times trailing non-GAAP EBITDA, which we do not view as problematic, since we expect strong and expanding free cash flow generation.
Operating margins continue to expand as Salesforce focuses on profitable growth. Management expects continued expansion of non-GAAP operating margins over the next several years. Further, Salesforce generated free cash flow margins over 25% in each of the last three years, including 31% in fiscal 2025. We believe that margins should ultimately exceed 30% as growth slows and we appreciate management’s more balanced approach between growth and margins. We think this level of free cash flow generation should contribute to a muscular balance sheet for years to come.
Read more about Salesforce’s financial strength.
We assign Salesforce an Uncertainty Rating of High. From a big-picture perspective, we believe CEO Marc Benioff will be difficult to replace, as he pioneered the software industry, co-founded the firm, and led it to be a dominant force with a broad portfolio of sales and marketing-related solutions. Generative AI is an emerging risk for software vendors. Salesforce largely operates on a seat-based model, which may face pressure from AI-driven efficiency gains, but offers AI features on a consumption basis. After several missteps early in the AI evolution, we think Agentforce is now on a positive trajectory.
We believe the most important metric for Salesforce investors is revenue growth. Therefore, continued top-line deceleration or growth that does not materialize as expected would likely hurt the stock.
While we do not believe acquisitions have been transformative, the company has certainly executed some larger transactions to help establish an immediate or larger presence with a particular solution. We believe the company is likely to continue to make acquisitions but has pulled back from larger deals. In these situations, valuation and integration will remain risks. While we do not see significant environmental, social, and governance risks, Salesforce faces strong competition in hiring software engineers and risks from a potential breach in its data centers.
Read more about Salesforce’s risk and uncertainty.
- Salesforce dominates its core CRM and service markets, but it still only controls 30% in a highly fragmented market that continues to grow in the 10% area each year, suggesting there is still room to run.
- The company has added legs to the overall growth story, including customer service, marketing automation, e-commerce, analytics, and artificial intelligence.
- As growth has decelerated, management is focused on improving margins and enhanced capital returns in the form of both dividends and stock buybacks.
- As the company grows larger, it may be increasingly difficult for Salesforce to grow faster than its various end markets.
- Salesforce has entered new areas via acquisition and has arguably paid material premiums in the process. Integration risk is real, as is the risk of increasingly large, dilutive, or ill-conceived deals.
- The company’s generative AI strategy has been a series of fits and starts. Even as Agentforce is now gaining traction, AI increases the risk of new or enhanced competition and pressure on existing seat counts.
This article was compiled by Irza Waraich.
This article was generated with the help of automation and reviewed by Morningstar editors.
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