Salesforce
Agents to the Rescue?
First - disclaimer.
Salesforce is one of the largest software companies in the world and continues to be run but its founder Marc Benioff. His track record has been spectacular. Revenue has grown from $5B ten years ago to $38B today.
Unfortunately, revenue growth has slowed dramatically in the last couple of years. See historical financials here. Fortunately, operating margins have improved equally dramatically going from 6% in fiscal 2023 to 19% in fiscal 2025.
Assuming AI doesn’t pose an existential threat to Salesforce (I don’t think it does), there are really two things investors need to think about.
1. What does revenue growth look like over the next five years
2. How do margins evolve over the next five years
Revenue Growth
In my base case, I assume revenue will grow at 7-9% a year for the next five years. It’s possible this is conservative because Agentforce ends up being a massively successful new business, but I don’t feel comfortable making this assumption in my base case.
There are also a couple of other drivers that could accelerate revenue growth.
Salesforce could start to raise prices. Historically, most of the growth has come from new accounts and upselling existing customers. If they start to raise prices for existing customers by 3% a year, that would provide a boost to revenue growth and be very accretive to margins.
International expansion. Currently about two thirds of revenue is from the Americas. As they invest in their international GTM motion, international revenue could easily equal American revenue.
Operating Margins
The last time I looked at Salesforce, I naively assumed operating margins would top out at 10%. Boy was I wrong!
Benioff has shown remarkable cost discipline over the last two years keeping operating expenses almost flat while revenue has increased 20%. Operating margins now stand at about 19% and I think they could easily get to 30% in five years.
There’s also a world in which they could get to 40%. Microsoft has a 45% operating margin, so its not inconceivable that Salesforce could be at 40%. If they can get margins to this level, they could be earning $20B in FCF in five years. If the multiple stays where it is today, you’d double your money.
Downside
From a downside perspective, if revenue growth slows to 6-7%, they should still be able to grow earnings 10% a year for the next five years. Applying a conservative 20x multiple to $15B in earnings five years out, you likely don’t lose money.
Conclusion
This doesn’t feel like a slam dunk investment at the current price, but it certainly seems worth owning a small position and potentially adding on weakness.
Notes
I don’t love the 8% in customer attrition every year, but this seems to be relatively stable over the last ten years.
It appears that Mason Morfit of ValueAct (he’s on the board of Salesforce) sold $350M worth of stock in December last year at $340 a share. He bought $100M of shares at $230 in June 2024, so maybe he was happy to take the quick win, but I’d think he’d have held on to his shares if he saw huge upside from here.