Salesforce Issues Weak Guidance Despite Beat on Earnings, Stock Drops

Salesforce posted mixed results for its fiscal second quarter, with revenue and earnings beating estimates but disappointing guidance sending its stock down nearly 8% in after-hours trading. Revenue rose 10% year-over-year to $9.33 billion, and net income climbed to $1.89 billion, or $1.96 per share, from $1.43 billion, or $1.47 per share, a year earlier. Despite these strong numbers, the company’s outlook for the third quarter fell short of analyst expectations. Management projected adjusted earnings per share of $2.84 to $2.86 on revenue of $10.24 to $10.29 billion, slightly below the consensus of $2.85 and $10.29 billion. While Salesforce maintained its full-year revenue forecast of $41.1 to $41.3 billion, it raised its adjusted earnings outlook to $11.33 to $11.37 per share, up from the previous $11.27 to $11.33 range. The weak guidance stems from challenges in selling marketing and commerce products, as well as slower growth in its core customer base. Salesforce has struggled with single-digit revenue growth since mid-2024, falling out of favor with Wall Street despite heavy investments in artificial intelligence. The company’s enterprise value to free cash flow ratio has hit a 10-year low, reflecting investor concerns about AI disruption and delayed returns. Salesforce is betting its future on AI, particularly its Agentforce platform, which uses AI agents to automate customer service tasks such as generating emails, crafting sales pitches, and creating marketing campaigns. Since its launch in October, the company has secured over 12,000 deals, with more than 6,000 now paid customers. CEO Marc Benioff emphasized that the company is not replacing humans with AI but rather redefining roles, noting that customer service teams have been cut from 9,000 to 5,000, with AI now handling half the workload. Despite these efforts, investor sentiment remains cautious. Salesforce’s stock is down 23% year-to-date, the second-worst performer in the Dow, trailing most large-cap tech peers. While competitors like Microsoft and Meta have seen strong AI-driven revenue growth—Microsoft’s Azure and Meta’s AI-powered ad system have boosted profits—Salesforce has not yet demonstrated similar traction. To reassure investors, the company announced a $20 billion increase to its share buyback program, bringing the total to $50 billion. CEO Benioff hinted that the capital could also be used for strategic acquisitions, following the $8 billion purchase of data management firm Informatica earlier this year. The broader issue, analysts say, is that while AI adoption is inevitable, its impact on profits is slow to materialize. A Federal Reserve paper from summer 2024 warned that the biggest hurdle isn’t technology but human adoption—many businesses still struggle to integrate generative AI into daily operations. If adoption remains limited, overspending on AI could lead to financial strain. Ultimately, Salesforce’s challenge lies in proving that its AI strategy delivers measurable, scalable returns. While the company is retooling its workforce and product suite for the AI era, Wall Street is demanding faster proof of monetization. For now, the market remains skeptical, reflecting a broader shift from AI hype to reality.