TipRanks Smart Value #29: Force Multiplier
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Dear Investors,
Dear Investors,
Welcome to the 29th edition of our recently launched TipRanks Smart Value Newsletter!
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This Week’s Top Value Pick: Salesforce (CRM)
Salesforce (CRM) is a leading global provider of cloud-based customer relationship management software and services. The company delivers an integrated platform that helps organizations manage sales, service, marketing, commerce, analytics, and enterprise collaboration. Its portfolio spans a broad suite of cloud-based applications, data platforms, and integration tools that enable organizations to connect customer data, automate workflows, and drive insights across their operations.
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Enterprise Evolution
Salesforce was founded in 1999 in San Francisco by former Oracle executive Marc Benioff as one of the first companies to deliver enterprise software entirely through the cloud, pioneering the software-as-a-service (SaaS) model at a time when on-premises deployments dominated the industry. Its early success stemmed from the launch of Sales Cloud, which allowed businesses to manage customer relationships without investing in costly IT infrastructure and laid the foundation for its recurring subscription revenue model.
Over the following years, Salesforce steadily expanded beyond sales into adjacent areas such as customer service, marketing, commerce, analytics, integration, and collaboration, reshaping itself from a standalone CRM tool into a multi-cloud enterprise platform. Strategic acquisitions were central to this evolution. The 2013 purchase of ExactTarget established the Marketing Cloud, while Demandware in 2016 became the backbone of the Commerce Cloud. That same year, Salesforce added Krux to enhance marketing data capabilities and Quip to bring collaborative document editing into its ecosystem. In 2018, the acquisition of MuleSoft marked a major leap into enterprise integration, followed in 2019 by the acquisition of Tableau to add advanced analytics and ClickSoftware to bolster field service. Salesforce’s largest deal came in 2020 with its $27.7 billion acquisition of Slack, which turned the company into a central hub for enterprise collaboration and workflow automation. CRM acquired Vlocity that same year, rebranding it as Salesforce Industries, to build vertical-specific cloud solutions.
More recently, Salesforce has entered a new phase centered on artificial intelligence and data-driven automation. It launched Data Cloud to unify customer data at scale and introduced Agentforce, enabling companies to deploy generative AI agents across their operations. To strengthen this AI foundation, the company has pursued targeted acquisitions including Own, Zoomin, Tenyx, Moonhub, Convergence.ai, and a pending $8 billion deal for Informatica, along with an agreement to acquire Regrello. These moves reflect Salesforce’s shift towards becoming a full-stack enterprise platform that integrates applications, data, and AI to drive productivity and digital transformation across global organizations.
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Platform Advantage
Salesforce operates a cloud-based software-as-a-service (SaaS) model anchored by its unified Salesforce Platform, which combines customer data, analytics, and artificial intelligence to help enterprises manage sales, service, marketing, commerce, and other customer-facing functions. The company primarily generates revenue from subscription and support contracts, which grant customers access to its multi-tenant cloud applications, regular updates, and technical support over fixed terms, typically invoiced annually. This model creates predictable, recurring revenue streams, as revenue is recognized evenly across the contract period. Salesforce also earns a smaller share of revenue from professional services, such as consulting, implementation, and training – delivered on time-and-materials or fixed-price arrangements, as well as from licenses of term-based software products recognized at the point of delivery.
A key strength of Salesforce’s business model lies in its ability to drive long-term customer relationships and expand spending within its installed base. Customers often start with a single product and later adopt additional modules to unify data and workflows, thereby reinforcing long-term contracts and driving revenue growth. The company also benefits from significant upfront investments customers make in configuring its software to their processes, which creates switching costs and deepens platform stickiness. The company’s extensive partner ecosystem, including system integrators, consulting firms, and independent software vendors, enhances its platform’s capabilities and helps accelerate customer adoption across various industries.
Building on its SaaS foundation, Salesforce is evolving toward an ‘agentic enterprise’ model, embedding generative AI agents through its Agentforce platform. This model combines three layers: a data layer anchored by Data Cloud, already generating about $7 billion annually and supplying standardized data from internal and external sources; an application layer spanning its core cloud products; and an agentic layer where AI agents automate workflows, orchestrate tasks, and augment human teams. Data Cloud integrates with platforms like Snowflake, Databricks, and BigQuery, and is being extended through deeper ties with MuleSoft and planned support for Informatica.
Partnerships are a strong driving force for both technological advancement and business expansion. CRM’s strategic partnership with Nvidia integrates the AI chip leader’s advanced AI hardware and software technologies with Salesforce’s AI-powered Agentforce and Data Cloud. By leveraging NVIDIA’s full-stack AI computing power, Salesforce boosts the speed, efficiency, and capabilities of its AI workflows and autonomous agents. CRM also collaborates with other hyperscalers like Google, Microsoft, and Amazon to expand AI-powered solutions and cloud infrastructure integration. These partnerships support scalable, secure, and real-time AI processing on Salesforce’s platform, driving innovation in AI agents and data management to benefit enterprise customers worldwide.
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Agentic Surge
Adoption is accelerating rapidly. Salesforce has signed more than 12,500 Agentforce deals, including over 6,000 paid deployments, with about 40% of new bookings coming from existing customers expanding usage. Pilot-to-production conversions rose 60% quarter over quarter, and more than half of the Fortune 500 members now use Data Cloud. Early deployments have delivered tangible efficiency gains, including 1.4 million customer service conversations resolved by digital agents at satisfaction levels matching human representatives. Companies like DirecTV and Falabella have moved from pilots to full-scale rollouts in a matter of months, reporting double-digit efficiency gains and faster customer response times.
Building on this momentum, the company is extending this agentic model to the public sector, recently securing a deal with the United States Army for an Agentforce-powered “Fast Pass” solution. The platform has received FedRAMP High certification, enabling it to handle sensitive federal workloads. Internally, Salesforce has cut support headcount by nearly 40% while boosting productivity, showcasing the cost efficiency of its agentic model. Management emphasized that this shift complements rather than disrupts its SaaS model, with AI expected to drive incremental consumption-based revenue on top of its subscription base.
To support this transformation at scale, the company is pursuing financial discipline. Much of its agentic business has shifted to a consumption-based model using flexible credits, which accounted for 80% of Agentforce bookings in the second quarter. Internal deployments are already lifting productivity and margins by automating manual tasks and reallocating staff instead of expanding headcount. Salesforce follows a “trinity” framework for capital allocation, deploying its annual operating cash flow across share repurchases, dividends, and strategic acquisitions. It has pointed to its pending acquisition of Regrello, which adds agentic supply chain capabilities, and its investment stake in Informatica as examples of targeted bets aligned with its AI-first roadmap.
As part of its broader effort to expand growth channels, Salesforce has identified the mid-market as a potential long-term growth engine amid its broader multi-segment strategy that spans small to medium businesses, mid-market, large enterprises, the public sector, independent software vendors, and its wider partner ecosystem. It has increased account executive capacity by 20% to expand coverage, reporting that AI-driven tools are helping smaller customers onboard and scale more quickly. Its sales pipeline is growing at a high-teens rate, large deals are up about 20% year over year, and 40% of its second-quarter annual contract value came from “create-and-close” sales motions.
Management has expressed confidence that this combination of AI-driven adoption, mid-market expansion, and disciplined execution positions Salesforce to return to sustained double-digit revenue growth while maintaining mid-30% operating margins and generating robust operating cash flow.
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Margin Momentum
Over the past several years, Salesforce has shifted from high-growth expansion to a more balanced profile of steady top-line increases, margin improvement, and cash generation. Over the past five years, CRM’s revenues have grown at a CAGR of 15.3% while its diluted EPS has expanded at 21.6%. This growth has been supported by the broad adoption of its core cloud products, rising enterprise demand for AI and Data Cloud offerings, margin improvement, and operational scale in subscription and support services.
In the second quarter of fiscal 2026, Salesforce reported net income of $1.8 billion and adjusted diluted EPS of $2.91, exceeding consensus expectations of $2.77. The outperformance was driven by robust subscription revenue, one-time license and professional services items, and disciplined expense management. Revenue rose 9% year-over-year in constant currency to $10.24 billion, with subscription and support revenue growing 9% to $9.7 billion on strong deal momentum among small and mid-market businesses adopting Data Cloud and AI solutions faster than large enterprises.
Geographically, the Americas remained the company’s growth engine, contributing 66% of revenue, led by accelerating digital transformation and AI adoption in the United States and steady gains in Canada. Europe delivered $2.4 billion (23% of revenue), driven by large cloud migration deals and AI-led adoption in the Netherlands and Switzerland, while the United Kingdom and Japan lagged amid delayed IT budgets, slower market expansion, and longer sales cycles.
Salesforce’s financial momentum has been fueled by consumption-driven data and AI monetization, large deals, and the durability of its recurring revenue base. Current remaining performance obligation1 (CRPO) rose 11% to $29.4 billion, reflecting booked future revenue. AI and Data annual recurring revenue (ARR) surpassed $1.2 billion, soaring 120% year over year, highlighting the shift toward usage-based monetization. Adjusted operating margin improved to 34.3% – its tenth straight quarter of expansion – signaling strong operational discipline.
These trends underpin management’s FY26 guidance for revenue of $41.2 billion at the midpoint, in line with Street estimates, with subscription and support revenue expected to grow 9.5%. Adjusted EPS is projected at $11.35 at the midpoint, above the Street’s $11.29. For Q3, Salesforce projects revenue of $10.27 billion (up 8–9% year over year), in line with Street estimates, and adjusted EPS is forecasted at $2.85, slightly below consensus at $2.86.
The company is also translating growth into cash generation, despite temporary fluctuations. In Q2 FY26, operating cash flow dipped to $740 million from $892 million a year ago, while free cash flow fell to $605 million from $755 million, primarily due to higher cash taxes and delayed billings rather than any structural weakness. Management reaffirmed its outlook for operating cash flow growth of 12–13% to about $15 billion, with capital expenditures expected to stay below 2% of revenue.
Its balance sheet remains conservatively managed. As of July 31, 2025, Salesforce reported a debt-to-equity ratio of 0.14 and debt at roughly 12% of total capital – well below the sector median – and holds an investment-grade credit rating of “A+” from S&P Global.
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1- Remaining performance obligations represent all future revenues under contract that has not yet been recognized as revenue and includes unearned revenue and unbilled amounts. Current remaining performance obligations represent future revenues under contract that is expected to be recognized as revenue in the next 12 months.
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Valuation Reset
Salesforce’s business is maturing, and so is its capital strategy. The company signaled a shift from a “growth only” phase to more solid mix of business expansion and shareholder compensation in February 2024 when it initiated quarterly dividends. In the most recent quarter, it declared a quarterly cash dividend of $0.416 per share, representing a 4% year-over-year increase and equating to an annualized payout of $1.66 per share. CRM offers a dividend yield of roughly 0.67%, above the technology sector average of around 0.57%, returning about 15% of its adjusted earnings to shareholders.
Salesforce has been actively repurchasing shares since 2022, when it launched its initial $10 billion share buyback program, with several extensions following since then. In September 2025, the board expanded the program by an additional $20 billion, lifting total authorization to $50 billion. As of July 31, 2025, $5.7 billion remained under the previous authorization, and during the fiscal second quarter, Salesforce repurchased $2.2 billion of its stock.
Together, these dividend and buyback initiatives reflect Salesforce’s growing financial maturity and confidence in its long-term cash generation, while offering a balanced approach to returning capital to shareholders.
Despite these shareholder-friendly measures, CRM’s stock has declined by approximately 8% over the past year. The underperformance has mostly been driven by negative investor sentiment across the enterprise software sector and persistent market skepticism about Salesforce’s ability to monetize its massive investment in AI product development. However, with software pessimism dissipating and investors beginning to realize that CRM is leading the sector in AI monetization, the stock appears poised for a rebound. Meanwhile, Salesforce appears undervalued relative to both its sector and its own historical averages. Based on non-GAAP trailing and forward P/E ratios, the stock trades at roughly a 7% and 15% discount, respectively, to the sector median, and at more than a 40% discount to its historical averages. This suggests that the market is cautious about potential risks to Salesforce’s earnings trajectory – such as competition, macro, and others – despite its ongoing margin expansion and steady revenue growth. When accounting for expected earnings growth, CRM appears notably undervalued, as reflected in its forward non-GAAP PEG ratio of 1.26, one of the lowest in its peer group and significantly below sector median.
Other valuation multiples tell a similar story. On a forward EV/EBITDA basis, the stock is trading about 9% below the sector median and nearly 40% below historical averages. CRM stock also sits at a more than 13% discount to the sector median on forward price-to-book and price-to-cash flow ratios. The stock also trades below its own historical averages on these same forward EV/EBITDA, price-to-book, and price-to-cash flow metrics, signaling a valuation reset even as its profitability has strengthened.
Compared with peers such as Microsoft, Oracle, HubSpot, and Intuit, Salesforce sits at the lower end of the valuation range across key metrics, including non-GAAP trailing and forward P/E, EV/EBITDA, price-to-book, and price-to-cash flow ratios. This relative discount suggests that the market has yet to fully price in Salesforce’s accelerating AI and data-driven growth and strong cash generation, potentially offering upside if the company continues to deliver on its earnings and free cash flow outlook.
Analysts on Wall Street remain broadly optimistic about Salesforce, as the company is leveraging rapid growth in artificial intelligence and its Data Cloud platform, supported by a strong balance sheet and profitability, to drive long-term innovation and strengthen its competitive position in the evolving enterprise technology market. Strategic partnerships, such as its collaboration with Pearson to offer certification exams, further expand its ecosystem and foster customer loyalty, supporting sustained platform adoption and recurring revenue growth.
Consensus estimates imply roughly 36% upside for the stock, with some projecting gains of more than 76% from current levels. Based on a Discounted Cash flow (DCF) analysis, CRM stock is trading at around 13% below its estimated fair value.
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Investing Takeaway
Salesforce presents an intriguing value opportunity as its market valuation appears disconnected from its improving fundamentals. After years of rapid expansion, the company has transitioned into a more mature phase defined by disciplined cost management, margin expansion, and robust cash generation. Yet investor sentiment has cooled, with the stock trading at a notable discount to sector peers and its own historical multiples despite solid earnings growth, a resilient recurring revenue base, and rising demand for its AI and data-driven platforms. This disconnect suggests the market may be underestimating Salesforce’s ability to convert its platform reinvention – anchored by Data Cloud, Agentforce, and a growing mid-market presence – into sustained growth and shareholder returns. For long-term investors, this combination of operational strength, financial discipline, and compressed valuation could offer an attractive entry point if the company continues executing on its growth and profitability goals.
