Why Salesforce Stock Is Down After Solid Earnings

The rapid decline in Salesforce stock has made it look cheap. (David Paul Morris/Bloomberg)

Salesforce reported solid second-quarter earnings results Wednesday afternoon, but a weaker-than-expected outlook was weighing on the stock.

Adjusted earnings-per-share rose to $2.91 versus Wall Street’s consensus estimate of $2.78, according to FactSet, and up from $2.56 cents last year. Revenue for the quarter reached $10.24 billion, ahead of expectations for $10.14 billion, and up 10% over last year.

Rounding out the good news were beats in other key metrics like backlog and operating margin.

The company’s annual guidance was a little better than expectations, but the outlook for the third quarter disappointed, especially on sales and backlog growth. But if we put those two together, and it implies a strong fourth quarter

Salesforce stock was down 6% in premarket trading on Thursday morning.

One of the stalwarts of the cloud-software revolution of the past two decades, Salesforce has recently fallen on hard times, with the stock down 30% from its high in December.

The rapid decline in Salesforce stock has made it look cheap. Of the 50 Salesforce notes Wall Street has produced since May, not one has been a Sell rating. Analysts’ average price target is $343, a 34% implied return from Wednesday’s close.

Two bear narratives have converged in 2025, and Salesforce is responding to both challenges with the same solution: artificial-intelligence agents. That sales growth rate in the single digits is the basis of the first bear narrative. From fiscal 2006 to 2022, Salesforce revenue grew by at least 24% annually, but that began dropping in 2023. In fiscal 2025, sales grew by only 8.7% over the year. Salesforce’s first-quarter report and annual guidance in May did nothing to quell this narrative.

Created with Highcharts 9.0.1Salesforce Revenue GrowthSource: Factset

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This is the usual progression of software companies that undergo a growth stage and then reach a mature stage in which the growth rate declines and the cash return to shareholders begins.

For example, after a long growth period, Oracle’s sales expanded at a 7.6% annualized rate from 2006-2023. At the same time it reduced its diluted share count by 48% through share buybacks, increasing its per-share metrics by 91%. Salesforce began its cash return program in fiscal 2023, and it has reduced diluted share count by 3% since then. In the earnings release, it reported that the board of directors had raised its buyback authorization from $30 billion to $50 billion, after spending $24 billion over the last three-and-a-half years on share repurchases. There were also $2.3 billion in dividend payments in the last six quarters

Salesforce is also trying to find its footing in the AI age, seeking to boost growth rates by introducing AI agents into its customer-relations-management software. Agents are software systems that can use AI language models to complete a complex series of tasks from a simple prompt. So far, uptake has been slow, and it will likely take some time for adoption of these new and potentially risky tools.

The second bear narrative is a broader reassessment of cloud software. Before the rise of web browsers that could run software, companies bought licenses and ran the software on their own servers and computers. The transaction was a one-time payment, plus support contracts, and customers often held out for years before upgrading.

Cloud companies such as Salesforce upended that business model. Buying and configuring cloud software is simpler, and there are fewer tech problems down the road. Updates are instantaneous for all customers. For the cloud companies, the switch to annual subscriptions provides a steadier stream of income, rather than the feast-0r-famine revenue cycle that characterized intervals between major updates**.**

Investors remember that tech disruption, and there may be another one afoot. AI agents could come to upend cloud software in the same way the cloud disrupted packaged software. Future “AI-native” contenders in this space might be just getting their first round of funding, or might not even exist yet. They could take incumbents by surprise, just as Salesforce did a couple of decades ago.

“The doom that I would say software investors have baked into us and a number of other names out there—we’re not seeing it in our data. We don’t see it in the customer base,” Salesforce head of investor relations Mike Spencer told Barron’s. “Anytime someone brings stuff to me, I challenge them to give me a customer that’s going down this path of abandoning all software. It’s just not real.”

Like many of its peers, Salesforce is answering this problem with AI agents, but it might have to upend its business model just as packaged-software companies upended theirs with the rise of the cloud.

Write to Adam Levine at adam.levine@barrons.com