Salesforce is slowing for reasons beyond AI

Transcript

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

1. 7:34

   of these earnings? Do you think that they are as bad as everyone else seems to think they are? I think the least of Salesforce's issue is AI. I actually think the issue with Salesforce is that their business is just decelerating rapidly. The growth rate was higher this quarter because they acquired Informatica, which is contributing at least 3% or 4% to that growth rate. So they're already only growing high single digits.

2. 7:58

   Just a couple of years ago, they were growing 15%. It's their business that's decelerating for reasons that have nothing to do with AI. They're losing share to HubSpot and Monday and service. now and Braze and Klaviyo and a whole cottage industry of companies that are providing sales and marketing software that's just better than Salesforce. Having said that, what you're saying is spot on in that the market is going to glop onto this and say, oh my goodness, AI is killing software. It's not. Salesforce is just decelerating and the results are declining. There's been plenty of companies that have reported good results so far this quarter, but their stocks went down anyway because of this negative narrative about software. But in Salesforce's case, it's really about just their core business not doing well.

3. 8:46

   Yeah. What do you think about the tension of this AI anxiety right now? You mentioned the AI is going to be less impactful than we thought it was going to be, which is why it's a bubble. And so the valuations of everything are going to come down. And then there's the other argument, which is the AI is going to be so powerful that it's going to ruin all the business models as we know it. Those two forces seem to be in real contention with one another.

4. 9:15

   And I'm struggling to figure out which one is actually the dominant sentiment on Wall Street, which one is actually the right sentiment, which one is crazier than the other. And it's hard to sort of pass out what the price of these stocks are actually telling us at this point, because those are two, as you say, completely opposite stories. I'd say that we've been living with that first type of anxiety, the, oh, the data center build-out isn't going to get a return for several months.

5. 9:47

   The software anxiety is more recent, but I'd say both are playing out in the market right now and causing a lot of fear. But I would actually posit that maybe that's about something bigger. The fact that investors are so jittery right now is probably an indication that we've had a very long bull run, that there's concerns about the U.S. government and its policies, the geopolitics of our global relationships, our geopolitics of our trade policy that has to change every week now.

6. 10:21

   And so I think the market is jittery. It's looking for bad news. And now we have two opposing but compelling and scary stories that investors are telling themselves that are causing them to knock down stocks. I think that there is that layer of just overall jittery markets based on where we are from an overall macroeconomic and geopolitical perspective. My instinct when I see these massive sell-offs is, I think, similar to yours, which is this seems to me an overreaction.

7. 10:58

   This seems to me highly emotional and not nearly grounded in the reality that we're seeing on the ground and the data, not nearly enough. At the same time, I could also see someone saying, you're just sweeping these concerns under the rug. It's convenient for you, especially you, Gil Luria, as someone who's in this industry, to say it's not a big deal. People are overreacting. Things are going to be okay.

8. 11:28

   Look how productive the technology is. What would you say to those people? That I'm really not trying to sweep anything under the rug. I'm talking about, we all have to make weighted probability decisions about potential outcomes. I'm just saying the we're overbuilding data centers is a 10% outcome. The AI is going to run everything over in the next two years is a 10% outcome. And there's an 80% outcome that neither of those terrible things is going to happen.

9. 12:00

   And if that's the case, we need to look at what the investable opportunities are. So one of them is NVIDIA, trading at 25 times when AMD and Bromcom are trading at 32 times with not as good of a business. Software, which for years traded on revenue multiples, which was always ridiculous. What does it even mean to be six times revenue or eight times revenue? That means nothing. Shareholders only get cash flows.

10. 12:27

    The value of a company is only the value of their future cash flows. All of a sudden, we're looking at this big universe of software companies on a cash flow base, on an earnings base. We have Microsoft at 20 times cash flow. We have ServiceNow and Dynatrace and Adobe trading at less than 20 times earnings or cash flow. And we have super hyper growth companies like Snowflake and Datadog and Shopify trading at maybe 35 times cash flow.

11. 12:53

    So those are actual real opportunities that the market has created because of the extreme scenarios. but I don't want to sweep them under the rug. They are potential scenarios. I'm just taking the weight and probability and saying, I think there's... 80% right up the middle, that we're going to be fine, that AI enhances productivity in a way that makes software companies better, especially winners in software.

12. 13:19

    Not every software company. There'll be plenty of software companies that fail, but the good ones will win, and those are more attractively priced than they've ever been. All right, Gil Luria, Head of Technology Research at DA Davidson. Gil, thank you for taking us through this. Thank you, Ed.