By Jacob Sonenshine

A little bit of Microsoft could go a long way for Salesforce stock. Investors should consider buying before its earnings release next month.

When Microsoft released better-than-expected earnings on May 1, it wasn't just a gift to its shareholders -- the stock jumped 8% -- but for all software companies, particularly those placing big bets on artificial intelligence. The reason: The earnings report showed little sign that software customers have soured on AI or are tightening their budgets in anticipation of a tariff-driven economic slowdown. The iShares Expanded Tech-Software Sector exchange-traded fund gained 1% that day and has been rising ever since.

Salesforce, which reports earnings on June 6, could be one of the beneficiaries. Analysts assume that investments in cloud services are still growing briskly, and they expect Salesforce's sales to grow to $9.95 billion, or 6.7% year-over-year growth. Much of that is coming from its ability to cross-sell more customer-relationship management applications -- such as Sales Cloud, which helps businesses acquire and serve their own customers -- at higher subscription prices.

The projected growth shouldn't be difficult to top. First off, when management provided first-quarter guidance of $9.73 billion in January, it included a $50 million hit to revenue from a strong dollar. Since then, the greenback has weakened, which could help push sales higher. Even excluding currency impacts, the guidance implies 7% growth, still more than achievable. Salesforce grew sales by 9%, including currency movements, in 2024, suggesting that current estimates should be reachable if the dollar stays near its current level.

Agentforce 2dx, a new and improved AI product that automatically updates its functions as data changes, will drive much of the growth. Management detailed the product at the March TDX 2025 developer conference, noting that it has increased use cases, operates autonomously, and responds to and interacts with any program. Essentially, it can help companies analyze data -- and make decisions -- faster, ultimately reducing costs. The latter should keep customers coming back for more.

"Our many discussions with partners and customers at TDX helped to reinforce our belief in Agentforce's potential to be a game-changing technology, delivering material productivity gains," writes Mizuho analyst Gregg Moskowitz.

And not just for customers. In the fourth quarter, Salesforce reported annual data cloud revenue, and AI recurring revenue came in at $900 million, more than doubling from the previous year. Management told analysts that it expects "significant upside" to pricing over time. The company has also been focused on cutting costs, which should allow margins to rise. As a result, analysts expect Salesforce to report first-quarter earnings of $2.55 a share and free cash flow of $5.9 billion. Stronger results would boost the market's confidence that cash flow can grow in the low double digits annually for a long time.

"As the Agentforce opportunity proves itself out, we see significant room for upside to free cash flow," writes Morgan Stanley analyst Keith Weiss. "We would be strong buyers of Salesforce ahead of these potentially improving numbers and investor sentiment."

At 19 times expected free cash flow for the coming 12 months, Salesforce doesn't look expensive. It's cheaper than the iShares Expanded Tech-Software ETF's 26.5 times, but Salesforce's growth potential is about on par with the rest of software. Weiss has a $405 target on the stock, 46% higher than Wednesday's close of $278.23.

Microsoft or no Microsoft, Salesforce looks like a winner.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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May 09, 2025 21:30 ET (01:30 GMT)

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