Top Software Stock to Buy for 2026? - CRM Stock Analysis

Summary

In this video, Zach analyzes Salesforce's recent earnings report and the company's underperformance in the stock market despite solid financial growth. He discusses the potential reasons behind the stock's 28% decline over the past year, including slowing revenue growth and market re-rating. Zach examines Salesforce's strong cash flow, its impressive long-term growth trajectory, and its AI-focused innovations like Agent Force. He also compares the company’s stock to its competitors, providing insights into its future potential. The video concludes with Zach's take on whether Salesforce presents a buying opportunity heading into 2026.

Takeaways

• 😀 Salesforce stock is up 5% after reporting strong earnings, but it's still down 28% over the past year, indicating a disconnect between financial performance and stock price.
• 😀 Despite consistent revenue and earnings growth, Salesforce’s stock has been hit by a broader trend of compressed valuations in the software sector.
• 😀 Salesforce’s core product is its customer relationship management (CRM) software, which is central to its strategy and product ecosystem.
• 😀 The company has expanded its offerings through acquisitions, such as Slack and Tableau, and is now leveraging AI with its Agent Force platform, which saw a 114% YoY growth in annual recurring revenue.
• 😀 Salesforce’s revenue growth has slowed over the past three years, but it still boasts a 10-year compound annual growth rate (CAGR) of 16.4%.
• 😀 Free cash flow per share has been growing at a 26.7% CAGR over the past 10 years, signaling strong financial health.
• 😀 The current price-to-earnings (PE) ratio for Salesforce is 20, the lowest since 2015, suggesting the stock might be undervalued compared to its historical multiples.
• 😀 Analysts have a consensus price target of $366 for Salesforce, implying a potential 53% upside from the current stock price.
• 😀 Despite slowing growth, Salesforce’s extensive product ecosystem and high customer switching costs provide a competitive advantage in retaining clients.
• 😀 Potential risks include competition from AI-driven solutions and the possibility of reduced demand due to automation, which could impact Salesforce's seat-based pricing model.

Q & A

What is the main reason Salesforce's stock is up 5% after hours despite the company's struggles in the past year?

The stock is up because Salesforce reported strong financial results, with significant earnings growth, despite experiencing a 28% drop in stock price over the past year.

Why has Salesforce stock underperformed over the past five years, despite consistently hitting record highs in earnings?

Salesforce's stock has underperformed due to a broader trend of software valuation compression, combined with slower revenue growth and market sentiment that has been less favorable to growth stocks.

How has Salesforce’s free cash flow performance compared to its stock price?

Salesforce has demonstrated strong free cash flow growth with a 10-year compound annual growth rate (CAGR) of 26.7%. Despite this, the stock price has not reflected this performance, with the stock trading at lower multiples.

What are the concerns regarding Salesforce’s slowing revenue growth?

Slowing revenue growth, which has decreased from 15% to 9% annually in recent years, is a key concern. This deceleration in growth has contributed to the downward re-rating of the stock.

What impact does Salesforce’s AI product, Agent Force, have on the company’s future prospects?

Agent Force, Salesforce’s AI-driven platform for customer service, has grown rapidly with 114% year-over-year growth, but still constitutes a smaller portion of Salesforce’s overall business. As this segment grows, it could drive future value for Salesforce, potentially boosting its stock multiple.

Why are some investors concerned about the impact of AI on Salesforce's business?

There are two main concerns: first, that AI could automate jobs, reducing the need for Salesforce’s seat-based pricing model; and second, that AI may lead to more competition as smaller competitors develop their own solutions, potentially threatening Salesforce's market position.

How has Salesforce managed its debt and cash flow in comparison to other tech companies?

Salesforce has a strong cash position with around $15 billion in cash and short-term investments, and negative net debt. Unlike some tech giants, Salesforce is not heavily investing in AI infrastructure, allowing them to leverage other companies’ AI advancements while keeping capital expenditures low.

What is the significance of Salesforce’s P/E ratio being at its lowest point since 2015?

The current forward P/E ratio of 20 is the lowest Salesforce stock has traded at since 2015, making it an attractive value proposition relative to its consistent growth and strong financials. This lower multiple indicates that the stock may be undervalued.

What does the discounted cash flow (DCF) analysis suggest about Salesforce's stock price potential?

The DCF analysis shows that Salesforce’s stock is currently trading near its intrinsic value at $227.97. However, if the stock were to re-rate to 20 times free cash flow, the implied share price could rise to $262, offering 11% upside. A further re-rating to 30 times free cash flow could see the stock price rise to $365, a 55% upside.

What are the potential long-term risks and opportunities for investing in Salesforce stock going into 2026?

The risks include slowing growth and competition from new AI-driven software solutions. However, the long-term opportunity lies in Salesforce’s expanding product ecosystem, its early stage AI offerings, and its strong position in customer relationship management, which could lead to stock price appreciation as these factors drive growth.