Salesforce (CRM -1.59%) CEO Marc Benioff has never shied away from extravagant statements. And with all the generative AI hype surrounding ChatGPT, which was built using Nvidia (NVDA 0.76%) tech, commentary on the matter from Benioff was a near guarantee. The software titan didn't disappoint during Salesforce's quarterly earnings call on Wednesday. Benioff stated:
The coming wave of generative AI will be more revolutionary than any technology innovation that's come before in our lifetime, or maybe any lifetime. Like Netscape Navigator, which opened the door to a greater Internet, a new door has opened with generative AI, and it is reshaping our world in ways that we've never imagined.
Generative AI does unlock all sorts of efficiency gains for knowledge workers, from content creators to software developers. It's early on in this "new AI" movement, but it does indeed look like a revolution. But will it usher in a new era for the stagnant Salesforce stock?
Will AI derail Salesforce's growth-to-value transformation?
Technology is an incredibly tough industry to consistently dominate in. As a company grows, investors demand more robust profitability. However, computing technology is in constant motion and requires a company to also constantly invest and innovate. Underinvestment could mean missing the boat when there are secular shifts. It's a tough balancing act, and generative AI seems to have set off such a shift.
According to Benioff, generative AI services could be even more monumental than mainstream access to the internet was in the 1990s. The jury is still out on that.
At any rate, AI does promise to dramatically alter workforce productivity -- the white-collar workforce in particular -- over the next decade. The problem is, Salesforce came under intense scrutiny during the 2022 bear market. Investors want to see tightening up on expenses to generate more robust profit margins and free cash flow generation. With generative AI here to gobble up budgets of software behemoths, surely Salesforce's transformation from all-out-growth to profitable-growth is at risk, right?
Data by YCharts.
Maybe not. In Q1 fiscal 2024 (the three months ended in April 2023), Salesforce reported a GAAP operating profit margin of 5%, and a non-GAAP operating margin of 27.6%. That puts the company a bit ahead of schedule in reaching its previously stated goal of 10.8% GAAP operating margin and 27% non-GAAP operating margin for this full-fiscal year. As a result, Salesforce's management upgraded guidance and now expects about 11.4% (GAAP) and 28% (non-GAAP) operating profit margin for this fiscal year.
Oh, and Salesforce beat revenue growth expectations in the quarter too, hauling in $8.25 billion in revenue, versus its outlook for as much as $8.18 billion provided three months ago.
Maybe AI is "revolutionary," but perhaps it's not hard to implement
The question remains whether this generative AI movement will be revolutionary for Salesforce's stock. What really stood out on the earnings call was how quickly Salesforce embeded generative AI across its suite of services.
A few months after ChatGPT entered the zeitgeist, Salesforce is nearly ready to launch its Einstein GPT service. Einstein GPT can help employees find and make sense of customer data points using simple language prompts, updated in real-time as dynamic and massive cloud-based work environments constantly change. It can also be used to help accelerate app development, for both advanced users and "low-code" users with little experience in building software.
Tableau GPT and Slack GPT are also ready to go. Tableau is the data analytics software acquired in 2019, and Slack is the work messaging and collaboration platform acquired in 2021. Both workplace tools will get a shot of AI to help speed up workflows and help users throughout an organization share information more seamlessly, and bring the usefulness many of these workers have found in ChatGPT directly into both Tableau and Slack.
All of this was added in just a few months, and without hampering Salesforce's profitability progress.
Generative AI has been in development for many years, but the general public is only now beginning to grasp its significance -- so it's simply a must for CEOs like Benioff to talk about it. Nevertheless, Salesforce is ready to help its customers embrace the moment, and it was (for Salesforce, anyways) a quick process to implement. If generative AI's promise of supercharging employee productivity pays off, Salesforce's sprawling operation could get the same efficiency boost as its software customers do.
Based on current year guidance, Salesforce stock trades for 79 times expected EPS, or 29 times adjusted EPS. This isn't a value stock. It's about the "cheapest" valuation Salesforce has ever traded for, though. If generative AI helps keep more modest revenue growth and profit margin expansion going strong, it will indeed transform this cloud software giant for the better.
