As generative artificial intelligence (AI) becomes more and more capable, businesses are looking for opportunities to integrate those capabilities into their operations. That typically requires an investment in software and a learning curve for workers.
Palantir Technologies (PLTR +4.33%) has managed to make integrating AI into businesses much easier over the last few years through its Artificial Intelligence Platform (AIP). The new service allows users to interact with its software using natural language, expanding its use cases and enabling less technically capable users to harness the power of its software. It's been an incredible success, leading to strong revenue growth and even stronger growth in Palantir's stock price.
But Palantir isn't the only software company integrating new AI capabilities into its services. In fact, another software-as-a-service company could surpass Palantir's value (currently $428 billion) on its way to becoming a $1 trillion company by 2035. Here's why I think Salesforce (CRM 1.15%) could be a huge winner over the next decade.
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A once-in-a-generation opportunity
Salesforce is already a leading enterprise software company. Its software ranges from its original sales software to customer service, marketing, communication, and data management. It sees an opportunity to integrate generative AI with all of its software.
But the bigger opportunity is its newest product: Agentforce. That's Salesforce's platform for developing AI agents that can automate and assist certain tasks. Management pointed to the opportunity in its Dreamforce Investor Day in mid-October. Enterprises will quintuple their spend on AI apps and platforms over the next five years, according to estimates from IDC cited in its presentation.
The early results for Agentforce have been strong. Data Cloud and AI recurring revenue climbed 120% year over year last quarter, reaching $1.2 billion. Agentforce and other generative AI services account for $440 million of that $1.2 billion, climbing 400% year over year.
Over the long run, management thinks that customers adopting Agentforce could increase their annual recurring revenue three to four times over. It showed multiple examples of companies more than doubling ARR since adopting Agentforce.
Revenue acceleration is around the corner
After years of slowing revenue growth, management expects its order pipeline to fuel revenue acceleration in the next 12 to 18 months. In fact, management forecasts a 10% compound annual growth rate over the next five years, reaching over $60 billion in revenue for fiscal 2030.
What's more, the company expects to be able to use its own software and AI platform to improve operating margin. While Palantir is fond of using the Rule of 40 to measure its financial success, Salesforce is aiming for the Rule of 50 in 2030, where its operating margin and revenue growth add up to more than 50. That implies continued margin expansion, reaching close to 40% (from 34% today).
Management has already made a major move rebalancing its workforce thanks to productivity improvements from AI. It cut 4,000 customer service jobs, as its AI agents can handle more requests and speed up human agents' responses. At the same time, it's hiring thousands of new salespeople. The repositioning of its workforce should increase sales while providing operating leverage.
NYSE: CRM
Key Data Points
The path to $1 trillion
Salesforce is currently worth just $240 billion. It will have to more than quadruple in value to reach $1 trillion, which is a big ask in just 10 years. But the stock is arguably undervalued today, and if it can execute on its outlook, it could put itself in a strong position to reach the trillion-dollar club by 2035.
Over the next five years, Salesforce expects to reach $60 billion in revenue with an adjusted operating margin of about 40%. That puts its non-GAAP operating income around $24 billion by the end of fiscal 2030 (calendar 2029). That's nearly double the operating income it produced last year.
If it can keep growing operating income at a low double-digit rate through calendar 2035 with a combination of operating leverage and continued strength in revenue growth, it would end that year with at least $42.5 billion in operating income. If investors give it an EBITDA multiple of about 23 or a PE ratio around 30 (depending on tax rates), its market cap will exceed $1 trillion.
The stock currently trades for just 16.3-times adjusted EBITDA over the trailing 12 months and 24-times adjusted earnings. But if revenue and earnings growth start accelerating, those multiples should expand as investors gain more confidence in the future of the business. On top of that, management plans to increase its share repurchases with its growing free cash flows over the next five years, resulting in faster earnings-per-share growth, which should support higher valuation multiples for the stock.
When you compare Salesforce's current valuation to Palantir's, the stock looks even more attractive. Palantir stock trades for about 340 times its adjusted EPS over the last 12 months. While it's growing much faster than Salesforce, it will need to produce some extraordinary results over the next decade to grow into that valuation. Salesforce's goals are achievable, its valuation multiples look poised to expand rather than contract, and it seems more likely to see its valuation climb to $1 trillion over the long run.
