Salesforce, Inc. (CRM), the leading customer relationship management software company in the world, is aggressively investing in AI to offer advanced capabilities to its clients. These investments are likely to yield lucrative returns in the long run, enabling the company to thwart the threat of competition while enjoying durable competitive advantages. While Salesforce CEO Marc Benioff believes the company is executing its AI strategy to perfection, some analysts believe the company needs to be even more aggressive with AI investments. I am bullish on Salesforce stock as I believe the company will enjoy long-lasting competitive advantages aided by AI integration.
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Salesforce Is Incorporating “Einstein” AI
As the leading customer relationship management software vendor in the world, Salesforce remains focused on improving the customer experience through strategic investments in new technologies such as AI. The company’s AI strategy is centered on Einstein, a suite of AI capabilities. Salesforce has integrated Einstein across all of its main products.
Some of the key integrations of Einstein include Einstein for Sales, which improves the sales process of a business by leveraging AI to identify successful deals while recommending the steps to be taken to close such deals efficiently. This tool offers real-time insights and guidance for sales representatives, enabling them to interact efficiently with potential customers.
Einstein for Service is another AI product launched by Salesforce to enhance the way businesses interact with their customers. The company offers AI-powered chatbots to improve the efficiency of customer servicing and has the capability to suggest resolutions to customer queries based on an understanding of the customer, derived from a knowledge base. In addition, the company also offers Einstein for Marketing, which helps marketers build personalized ad campaigns based on a deep analysis of customer preferences.
Salesforce, as part of its AI strategy to dominate the customer relationship management software industry, has introduced a novel generative AI product named Einstein GPT as well, which allows users to create content, gain insights, and get a deep understanding of a related topic through natural language prompts similar to ChatGPT. The company has integrated Einstein GPT into several products including Slack, which is one of the leading team collaboration tools in the world.
Steadily Investing in AI Startups
In addition to integrating AI into existing products as discussed above, Salesforce has made an ambitious move to invest in AI startups to gain early access to unique technologies. The company, through Salesforce Ventures, launched a Generative AI Fund in March 2023 to invest $250 million in startups and later boosted the targeted investment value to $500 million amid the growing popularity of AI. In the long run, integrating novel technologies developed by these startups into its products will help Salesforce gain an edge over its competitors.
Some of the other notable AI investments of Salesforce include a $200 million investment in Hugging Face, the largest open-source AI community in the world. Hugging Face has quickly established itself as the go-to source for AI developers, which makes this strategic investment a key pillar of Salesforce’s AI strategy of dominating the CRM software sector in the long term through a differentiated product offering that leverages AI technology.
In summary, Salesforce is aggressively integrating AI into existing products while investing in startups to gain early access to new technologies, which seems a prudent strategy to make the most of AI while keeping a close eye on profitability. These investments are likely to lead to long-term competitive advantages, resulting in sustainable earnings growth.
Salesforce Is Focused on Improving its Margins
Amid the focus on executing the AI strategy outlined above, Salesforce has not deviated from its long-term profitability goals, which is an encouraging sign. In fact, the company has doubled down on restructuring efforts to drive operating margins higher, and the results are already visible. In the second quarter of Fiscal 2025 ended July 31, the non-GAAP operating margin reached 33.7%, an improvement of more than 210 basis points year-over-year. GAAP operating margin also hit a record high of 19.1%, which underlies the strong profitability improvements at Salesforce.
This notable margin improvement came on the back of strategic cost management initiatives such as optimizing the workforce over the last 18 months. The company, as part of this cost resetting strategy, has been able to reduce real estate and travel expenditure as well, contributing to higher operating margins. A key characteristic of this cost-cutting strategy has been to maintain high levels of capital investments. Research and development expenses remained steady at above 14% of revenue in Q2 FY25 and Q2 FY24, with the cost improvements coming from a reduction in sales and marketing expenses and cost of revenue.
In addition to cost management, Salesforce’s focus on high-margin products such as cloud offerings and AI-enabled business solutions has resulted in margin improvements.
The improving margins of Salesforce have already attracted praise on Wall Street. Third Bridge analyst Charlie Miner recently commented that there is every reason to be excited about the expansion in margins, as this is important to make up for the decelerating revenue growth.
Salesforce’s margin expansion is an early sign of long-lasting competitive advantages, and continued AI investments should help the company maintain this momentum in the foreseeable future.
Is Salesforce a Buy, According to Wall Street Analysts?
Salesforce’s AI strategy and the investments outlined earlier have not gone unnoticed among Wall Street analysts. For instance, Goldman Sachs analyst Kash Rangan believes Salesforce is one of the most under-appreciated AI winners in the market. The analyst, after digesting quarterly earnings last week, commented that the company’s early success with creating and deploying generative AI agents for enterprise use will set the stage for lucrative returns from AI investments in the long run.
Barclays analyst Raimo Lenschow, while acknowledging Salesforce’s AI progress so far, commented last week that the success of new AI solutions, scheduled to be introduced at the Dreamforce 2024 event later this month, will be the key to determining the long-term outlook for Salesforce stock.
However, not all analysts are impressed by Salesforce’s AI efforts. RBC Capital Markets managing director of software equity research Rishi Jaluria believes Salesforce has the potential to become a major beneficiary of GenAI but claims the company has not been aggressive enough in capturing some of these market opportunities.
Based on the ratings of 33 Wall Street analysts, the average Salesforce price target is $304.48, which implies upside of 20% from the current market price.
The Takeaway
Salesforce, to maintain its dominant position in the customer relationship management software market, is aggressively investing in AI while keeping a close eye on profitability metrics such as operating margins. In the long term, strategic AI investments are likely to lead to competitive advantages, setting the stage for robust earnings growth. Given that stock prices follow corporate earnings, Salesforce stock seems well-positioned to enjoy long-term gains in the market aided by the improving prospects for earnings growth.
