Salesforce stock (CRM) surges ahead by over 22% on Thursday since releasing strong second quarter earnings results, coming at a time when AI demand is driving growth within the software sector.
Macquarie US head of software and services research Steve Koenig examines what he is seeing from tech investors and how Salesforce performed.
Well software stocks are pushing back on fears that AI could make traditional software less valuable. Strong quarters from Salesforce, CrowdStrike, and Okta are showing AI may actually be creating new demand, especially in cybersecurity. For more, we’re bringing in now Steve Koenig, the firm’s US head of Software and Services Research. Steve, it’s always good to see you. Um, maybe start here, Steve, you know, coming into earnings, there was this fear kind of front and center out there that, you know, AI represents this this paradigm shift and it’s going to destroy a lot of software value. Before getting into the specific names, Steve, just bigger picture, I’m curious, you know, how do you think this earning season has impacted that story, Steve? How has it impacted that narrative?
Yeah. Hey Josh, thanks for having me. You know, I think this earnings season has caused investors to um, look at the issue of of potential AI disruption in software in a little bit more of a nuanced fashion. And, um, you know, as we’ve been saying now for the last 12 months or longer, um, you’ve got a variety of use cases covered by software vendors, and some of those use cases uh are are ripe for using AI to really change how they operate. And and and so that creates both risk and opportunity for incumbent vendors and new players alike, right? And then there are use cases which have to be very deterministic, you know, posting entries to a general ledger, two-phase commit to a relational database, etc. And you you AI is not going to have as much of a grip there in terms of disrupting how that sort of uh functionality happens. So, so I and I think the other thing about this earning season is um, it’s all about acceleration. You know, the companies that are showing acceleration, which is basically everybody that reported last night. We cover Salesforce, CrowdStrike, Okta. Um acceleration is being greeted very positively by investors and the stocks that can show acceleration are getting rewarded.
So let’s dig into some some names. Uh, software names you know very well, Steve. Get your your reaction here. Salesforce is ripping higher in today’s trade. Marc Benioff is saying, ‘This is the best quarter ever.’ He’s telling reporters that this ‘Saaspocalypse’ narrative has been such nonsense, he says. What do you make of this Salesforce report? And is the stock reaction, you know, up 22% here, is it is it justified, Steve?
Yeah. Well, you know, Salesforce put up um a bit of acceleration and um they also raised their guidance, uh revenue guidance for the full year considerably. I think it was like $200 million. So that was greeted positively. I think that’s coming from the strength in Q2 bookings. They they they executed well in Q2. Um and then some of the acquisitions play into the uh, you know, the strength as well. I think Informatica is doing well. So it it basically alleviates some fears. You know, lastly, I think, um, you know, Benioff is uh pretty much a marketing genius and uh I think the uh I think the company’s move to get closer to Anthropic and to open up this concept of headless Salesforce so that Claude, for example, can use Salesforce uh and Claude can and users can engage with Claude, but Salesforce remains the system of record uh for customer relationship management. I think that was a that was a very good move and I you know, I think that will probably pay dividends down the road.
To be clear though, Steve, uh correct me if I’m wrong, but you’re neutral on this name. You you know, you’re on the sidelines. How why are you on the sidelines, Steve? And and what would you need to see to get more constructive?
Yeah. Well, I I think what we’d like to see is um evidence that the company can grow on an organic constant currency basis, that they can accelerate their growth. You know, right now that that growth rate organically constant currently is probably like 6% to 7%. And and I think we and a lot of investors on the buy side want to want to see that kind of high higher single digits. And um it’s not clear the company’s not showing us that yet. Um and so we’d like to get a little bit more visibility that Salesforce can actually do that.
Let’s uh talk about another name you cover uh that reported, CrowdStrike. It’s up around 20% right now, Steve. Uh a beat, a raise. You know, there was some hot talk at one point AI would really d- disrupt this space as well. You look at this report, what what did you learn about the company, Steve, and the broader broader sector?
Yeah. Well, getting back to again, acceleration being the key here. You know, they they raised their full year guidance for uh annual recurring revenue by six points to something like 34%. So that was greeted very positively. What’s driving that? Um I think the company is executing well. I think uh chief security officers are getting more budget. Um and I think a part of that is is being driven by the AI risk. Now, those products which govern and secure the use of AI by enterprises, um they’re pretty nascent, you know, from CrowdStrike and Okta alike. But those products are sparking a lot of conversations between those vendors and their customers. Lastly, you’ve got um with Anthropic’s um work on Mythos, this um this capable, very capable frontier model uh that can find vulnerabilities and exploit those vulnerabilities. Um the risk that that sort of capability can get out to bad actors, whether they use open source models or fine tune their own models. Um that that we call that the Mythos risk and and that risk is sparking a lot of um uh CISO conversations with these vendors. And um and I think those conversations translate if not to sales of some of the newer products to protect AI, to sales of core products to beef up uh enterprise defenses.
That stock, Steve, CrowdStrike, it’s up more than 90% this year. Do I want to buy here, Steve, or or are we now pricing in a lot of good news?
Yeah. Well, it’s a great question, Josh, and you know, we try to make the right calls. We’re we’re neutral rated on CrowdStrike. We’re we’re buy rated on Okta and also in cybersecurity we’re buy rated on Zscaler. I think if you look at how uh the cybersecurity stocks have performed year to date, it’s almost um, you know, most of them are up very strongly and it’s very uh heavily correlated with how big they are. The bigger vendors are getting more attention. Uh enterprises are consolidating on major platforms. and CrowdStrike’s like the second biggest public vendor after Palo. Uh and when you’re talking about the pure play cyber companies. I think with CrowdStrike, I mean, it looks it looks kind of fairly valued here. Um, you know, so the question going forward is uh can they continue to accelerate, but beyond some of these numbers that we’re seeing now.
So we’ll, we’ll certainly keep our attention on that.
Let’s end on Zscaler, which you mentioned, Steve, because their earnings are on deck. They report next week, September 3rd. What do you expect to hear on that one, Steve?
Yeah. Well, you know, Zscaler is a a fairly ubiquitous platform with um, you know, they they uh originated the whole concept of of um of zero trust access. And and they’re in a lot of enterprises. And, you know, I think the this this Mythos impact, which is causing CISOs to shift priorities and giving C- CISOs more budgets, I think that’s bound to help Zscaler as well. Now, Zscaler’s stock hasn’t performed as well this year as the others. They’ve had um some execution issues and some departures in their go-to-market. Um I think there’s a high likelihood we could get some mean reversion here with good execution uh in Zscaler’s uh fiscal Q4 here. And um and that uh should lead to some some better performance out of this stock. So we we do like Zscaler here and I think the evaluation is more attractive, you know, than than a CrowdStrike, for example.
Steve, as always, so good to have you on the show. Thank you.
