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My take - digesting Salesforce’s Q1 and what it means for it and the tech market’s future

Rebecca Wettemann Profile picture for user Rebecca Wettemann June 4, 2024
Summary:
Wall Street gave Salesforce stock a pounding last week on the back of its Q1 earnings report. Here's my personal assessment of how this should have been viewed by investors.

Salesforce

Since the disappointing (not disastrous) earnings report from Salesforce last week, the company – as well as the Dow and other tech stocks – has taken a hit. Some have marked it as the harbinger of a decline in software as AI takes over, other as the eventual fall of a Street darling with years of meeting or exceeding estimates, still others as a cautionary tale of what happens when publicly traded companies respond to activist investor pressures. They’re all – mostly – wrong.

First, let’s digest what happened last week. Salesforce, on the heels of a downbeat report from Workday (which has a completely different delivery model, buyer, and market), reported slightly worse-than-expected revenues and slightly adjusted guidance. Wall Street went nuts, punishing Salesforce as well as other really well-run adjacent companies like ServiceNow (which has had great consistent performance historically as well and no hints of tailwinds).

So, what really happened at Salesforce? Having followed Salesforce as an analyst for more than 20 years, here’s what I see:

  • Salesforce had to respond to activist investors last year, leading it to dramatically cut marketing and customer acquisition investments, meaning it wasn’t able to invest in general brand investments, top-of-funnel marketing, and pipeline nurturing and deal closing efforts as it has in the past. Less funding for sales people to meet with prospects at Salesforce events, for example, meant less connection with potential customers.
  • Salesforce has historically created a huge internal disruption at the beginning of the year. Everyone has to come up with their new V2MOM and re-organizations happen. At the sales level, that means a number of accounts are reassigned to new account managers and they have to reinvigorate the Salesforce relationship with newly reassigned accounts.

These two things alone probably would have been ok for Salesforce. But, at the same time, Salesforce was navigating the shift to generative AI. As CEO Marc Benioff mentioned in the earnings call, explaining AI and how it works to customers – as well as the benefits of Data Cloud – is a completely different skill set from extolling the benefits of sales, service, and marketing software capabilities. So is explaining to them what they need to do to get their data ready for AI.

To pile on to this, Salesforce has delivered generative AI capabilities at a blistering pace across its sales, service, marketing, and commerce clouds. While it has hammered on its trust message, the practical explanation of how you can trust Salesforce (like its audit trail, which shows clearly how Salesforce protects its customers’ CRM data from LLM [Large Language Model] exposure) has not been articulated as clearly as it could be.

So, when you slash marketing (read: customer acquisition) investment, re-organize sales teams based on traditional customer acquisition and product introduction timelines, and rapidly introduce new products based on emerging technology with a high level of complexity and risk, you’re likely going to miss on revenue expectations.

Naïve

The argument that AI investments are cannibalizing enterprise software investments is naïve. If anything, what we’ve seen in the past year is a shift away from companies thinking they’re going to build their own LLMs and AI applications as they realize how complicated and costly it can be. Instead, they’re looking to software vendors like Salesforce to do the heavy lifting for them, ensuring the data security, hallucinations, toxicity, and other AI risks are covered by the vendor so they can get the power of AI with either out-of-the-box capabilities or customizable prompts. This approach, at least in the short term, lets leaders deliver quick AI wins with minimal risks, which is what boards are demanding.

That’s why Q2 will be so important to watch. There’s still a lot of untapped opportunity for Salesforce with customers – both AI and otherwise – so a disappointing Q1 isn’t a bellwether for its financial future. Q2 performance will be a better indicator of where things are heading. Salesforce’s note that deals are delaying or shrinking is something that we’re hearing across the industry, but it’s a trend that’s particularly important for a vendor selling enterprise software deals at a premium price. When big deals push, they have a big impact on a quarter.

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