Salesforce's (CRM 0.57%) uninspiring first-quarter earnings, reported on May 30, startled investors, who expressed their displeasure by driving the stock down 20% -- the worst single-day price decline in the company's 20-year history.
The company's revenue miss and weak guidance were cause for concern. But the more significant story is the onset of forces impacting the company that are as unpredictable as they are profound, such forces could have adverse consequences for Salesforce's short to intermediate-term prospects.
Salesforce's growth trajectory suddenly stalls
Salesforce's pedestrian first-quarter fiscal 2025 results were worrisome in several areas. Revenue grew 11% year-over-year in nominal and constant currency terms to $9.1 billion -- the first time this measure struggled to break single digits. Second-quarter revenue guidance was $9.2 billion -- which would be a tepid 7.2% increase.
The company's current remaining performance obligations, which is revenue booked for prepaid subscription services, but not yet realized, barely hit 10% year over year.
Management previously assured that the company's artificial intelligence Data Cloud tools would be the driver of future growth. However, as reflected in anemic first-quarter results, its applications aren't yet catching fire with customers.
How could Salesforce's growth engine have stalled so suddenly?
AI will boost some companies' profits more than others
It's no coincidence that Salesforce's poor revenue growth happened in tandem with the maelstrom created by AI mania. Because it's a disruptive, unproven technology, exuberant profit projections that anticipated the earnings potential from AI would spread sector-wide were clearly unfounded.
Salesforce is caught in the middle of a volatile, unpredictable AI innovation and investment cycle. As businesses seek to integrate AI's transformative capabilities within their operations, it's now painfully clear that all tech enterprises that offer very different AI services will not share the profits generated from designing and deploying AI systems equally.
Nvidia, Microsoft and a few other cloud infrastructure companies have reaped the lion's share of rewards that are enhancing their bottom lines without delay.
Amidst the initial hoopla associated with the earnings potential from AI and its capabilities to radically alter business systems operations, the enormous costs of training and deploying AI models seemed to have been overlooked by all early stakeholders and tech visionaries.
Venture capital firm Sequoia has estimated that in 2023, the tech industry spent $50 billion on chips from Nvidia to train AI models and received only a $3 billion return on its investment.
Unfortunately for Salesforce, since information technology (IT) budgets currently prioritize spending on AI configurations, there's little money left for enterprise cloud software.
Outlook for Salesforce is murky
Currently, enterprises are scrutinizing whether the purported benefits of AI implementation will demonstrably enhance productivity. Existing AI tools, such as Microsoft's Copilot and others, are far from foolproof. Recent tests conducted by the Wall Street Journal found the results returned by these highly touted offerings ranged from somewhat useful to borderline comical.
Given its staggering costs, until the technology matures, IT chiefs will be circumspect about how much they continue to spend on AI -- a challenge Salesforce must now surmount.
Salesforce CEO Marc Benioff seemed to confirm these headwinds when he stated on the most recent earnings call that, "when you look at some of the transactions that we saw in Q1, we saw compression on many deals that we ultimately ended up getting done, but they got smaller when we ultimately closed them."
Benioff noted additional problems the company faces, "people delayed decisions that we thought would actually happen in our first quarter. And this no-decision issue is coming up more frequently than we anticipated."
The CRM giant is a victim of crowding out in the investment cycle. It's impossible to predict with certainty when companies will spend more money on cloud software vendors or the extent of their commitment to adopting and integrating the new technology.
Salesforce will also face increased competition. Many companies are either offering or building in-house AI-capable applications that are functionally similar to Salesforce's current AI enterprise product. For example, Oracle's enterprise software, combined with its new flexible AI cloud configurations, can provide customers with unique cloud software capabilities that closely resemble those currently offered by Salesforce.
AI is a revolutionary technology in the nascent stages of development. As it evolves, there will be additional clarity on which tech companies will ultimately benefit and when. But for now, those questions will remain unanswered.
Due to the unpredictability of the company's near- to intermediate-term fortunes, investors must realize that Salesforce is sailing in uncharted waters, and it may be quite some time before it makes landfall.
