Salesforce (CRM -0.71%) was one of the pioneers of cloud-based software, but it fell out of favor during the pandemic as expenses soared and revenue growth suddenly slowed. It was all but forgotten, except by longtime shareholders, that co-founder and longtime CEO Marc Benioff actually knows how to grow a profitable business.

Benioff and company just provided a reminder that they know what they're doing. The company beat expectations in its latest quarter, and provided yet another upgrade to its outlook for current-year profitable growth. As the economy slows and what customers need from cloud-based software evolves, Salesforce remains a top-notch stock in my book.

Another big Salesforce guidance upgrade

Salesforce's second quarter of fiscal 2024 (the three-month period ended in July 2023) was better than predicted. Revenue was up 11% year over year to $8.6 billion, $70 million above the high end of management's guidance provided a few months ago.

Better yet, GAAP-based operating profit margin was 17.2% in the quarter, up from just 5% in Q1. Operating profit margin on an adjusted basis was a very healthy 31.2%. There are two main reasons for the discrepancy between the two metrics:

  • Non-cash depreciation and amortization expense ($890 million in Q2, versus $907 million the year prior) due to the many acquisitions Salesforce made over the years, culminating in the massive takeover of work messaging app Slack in 2021.
  • Employee stock-based compensation (SBC) totaling $724 million in Q2 (versus $851 million last year), which Salesforce has been winding down after overhiring from late 2020 through 2021.

The company has more than made up for the difference in SBC, though, as it repurchased another $1.95 billion worth of stock in Q2. Salesforce has turned over a new leaf, and is in the early innings of returning excess cash to shareholders.

Given another solid quarter of outperformance, Benioff and the top team once again raised guidance for full fiscal 2024 year (which ends in January 2024). Revenue is now expected to be up 11%, to a range of $34.7 billion to $34.8 billion (from $34.5 billion to $34.7 billion before). Full-year GAAP operating profit margin is now expected to be 13.3% (rather than 11.4% before).

Solid execution in a slowing economy

Of course, Salesforce's predicted 11% pace of revenue growth is a sharp slowdown from its pacing of over 20% in years past. You can chalk this up to a transition year for Salesforce, but a slowing global economy is also to blame. Organizations are still in cash conservation mode and are delaying new software deployments for now.

However, as Benioff explained in the last couple quarters, Salesforce is revamping its large software suite to provide more of what customers need: automation. One way cloud users are looking to cut costs is by finding new ways to automate tasks, which reduces the need to hire new employees, or otherwise allows them to shift their workforce away from redundant tasks to focus on other things.

In the current round, that automation is coming in the form of generative AI, embodied by OpenAI's ChatGPT. Salesforce has already embedded generative AI throughout many of its services -- from the core relationship management software to its data analytics platform Tableau -- and continues to advance new ways to make its software more predictive and insightful.

These updates do come with some product price increases, but Salesforce's recently signaled pricing changes are the first in seven years. Generative AI is just the latest product improvement that's been released in that time.

It's too early to say what's in store for Salesforce next year, but I'd expect growth from these new initiatives to kick in. Add in more expected profit margin increases, and it's not hard to see why the market has quickly warmed up to the stock again this year.

Following the quarterly update, Salesforce trades for 65 times expected current-year earnings per share, or 28 times expected earnings on an adjusted basis. In a new era for the cloud, in which profitable growth and AI automation will be the primary focuses, this remains my top cloud software stock for the long term.