Salesforce Leverages AI and Data Cloud for Future Expansion, Eyes Significant Margin Gains and Sustained Growth, Analyst Says – Salesforce (NYSE:CRM)

RBC Capital analyst Rishi Jaluria reiterated Salesforce Inc (NYSE:CRM) with an Outperform and raised the price target from $325 to $350.

The analyst hosted investor meetings with Valmik Desai, Director of Investor Relations, and Brooke Bakewell, Senior Manager of Investor Relations, which focused on Generative Artificial Intelligence, Data Cloud, margins, and macro.

Jaluria noted that customers are enthusiastic about generative AI and, in many cases, are turning to Salesforce to help with their AI strategies. 

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That said, with Copilot in public beta and no release date set yet, it will likely take time before GenAI conversations translate into meaningful revenue (fiscal 2025 guidance assumes no GenAI contribution). 

The analyst noted that the company believes it is well-positioned to benefit from AI because Salesforce, especially Sales/Service Cloud, serves as a control plane where people spend the vast majority of their day and a store for the majority of customer-centric data. 

Salesforce’s first signs of traction with AI have shown up in Data Cloud, which is now ~$400 million in ARR, up 90% YoY. Data Cloud, which began as a marketing-focused CDP (customer data platform), helps companies connect historical and real-time data and serves that data natively within all Salesforce products, Jaluria noted.

Importantly, Data Cloud helps connect the different clouds from Salesforce and enable AI use cases. The analyst added that the company believes Data Cloud remains underpenetrated today and can be a long-term growth driver. 

Salesforce has seen impressive margin expansion, with adjusted operating margins growing from 18.7% in fiscal 2022 to 30.5% in fiscal 2024 (and guidance of ~32.5% in fiscal 2025), driven primarily by restructuring and cost-cutting/discipline, Jaluria flagged.

The next stage of margin expansion will likely come from improving GTM, which involves shifting from product-based selling to persona-based selling and bundling and communicating Salesforce’s value proposition on driving productivity and efficiency rather than growth, which is important for a tough macro, he said. 

Salesforce’s execution has improved partly due to the GTM changes, leading to stronger net new bookings in the second half of fiscal 2024, the analyst stated. Notably, the guidance doesn’t imply better macro but does assume continued strong execution, supporting Salesforce’s ability to sustain double-digit growth without an improving macro, he said. 

Jaluria returned feeling more optimistic about Salesforce’s ability to sustain growth, improve margins, and improve operational and cost discipline. He also appreciated the color around Data Cloud and the AI strategy.

Jaluria projected first-quarter revenue and EPS of $9.15 billion and $2.38, respectively.

Salesforce stock gained 55% in the last 12 months. Investors can gain exposure to the stock via REX FANG & Innovation Equity Premium Income ETF (NASDAQ:FEPI) and SmartETFs Advertising & Marketing Technology ETF (NYSE:MRAD).

Price Action: CRM shares traded lower by 1.59% at $294.39 on the last check Friday.

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