Hook - Thesis
Salesforce (CRM) dropped into the low $240s on heavy volume today, a nearly 7% daily slide that leaves the stock trading well below its recent range. That move looks driven by broad market weakness and headline-chasing sentiment rather than a deterioration in the business. The company posted another quarter of double-digit revenue growth sequentially, solid operating margins, and continued capital returns. At ~962 million diluted shares outstanding and a mid-$240 stock price, the market is under-appreciating how resilient the core CRM franchise is and how management is converting scale into earnings and buybacks.
Why the market should care
Salesforce remains the dominant enterprise cloud CRM platform, with Customer 360, Service Cloud, Marketing Cloud, Commerce Cloud and the integration layer (MuleSoft) forming a sticky, cross-sellable product stack. In the quarter that ended 07/31/2025 the company generated $10.236 billion in revenue and $1.887 billion in net income. Gross margins and operating profitability are healthy - gross profit was $7.994 billion and operating income $2.332 billion in the latest quarter - showing that revenue growth is translating into incremental profit rather than being entirely reabsorbed by costs.
Business snapshot - what the numbers say
- Top line: Revenues were $10.236 billion in Q2 (fiscal 2026), up from $9.325 billion in the comparable quarter a year earlier. That implies roughly a 9-10% year-over-year increase and sequential growth from the prior quarter ($9.829 billion in Q1 fiscal 2026).
- Profitability: Net income in the most recent quarter was $1.887 billion with diluted EPS ~ $1.96. On a trailing-four-quarter basis (adding the last four reported diluted EPS figures), TTM diluted EPS is roughly $6.60 per share.
- Margins: Gross profit of $7.994 billion on $10.236 billion revenue implies a gross margin north of 75%. Operating income of $2.332 billion gives an operating margin in the mid-20% range for the quarter.
- Capital structure and returns: Long-term debt is modest at $8.436 billion against equity of $61.328 billion; management is returning capital via recurring quarterly dividends (most recent declaration 12/04/2025; pay date 01/08/2026) and material financing outflows that are consistent with buybacks (-$2.503 billion financing cash flow in the latest quarter).
Valuation framing - why the pullback is mispriced
At ~962 million diluted shares and a last close in the low $240s (intraday snapshot close ~ $241.06), the market cap is roughly $232 billion (962m x $241). Using the TTM EPS of ~ $6.60, the stock is trading at a price-to-earnings multiple near the mid-30s (about 36x). That multiple is high versus legacy software names during normalized markets but reasonable given Salesforce's operating margins, growth profile, and an ongoing share count decline driven by buybacks.
Context matters: Salesforce's business has become less capital-intensive and more cash-generative compared with earlier acquisition-driven years. Operating cash flow over recent reported quarters has been positive and episodically large; even after accounting for buybacks and a modest net-debt position, the company has flexibility to support growth, dividends and buybacks. A re-rating back toward the 40-50x EPS multiple that the market could assign for a quality, AI-enabled enterprise platform would put the stock materially higher. For example:
TTM EPS ~ $6.60
P/E 40 -> price = $264
P/E 50 -> price = $330
P/E 60 -> price = $396That math shows how sensitive the outcome is to multiple re-expansion. The current pullback compresses downside while leaving significant upside if Salesforce keeps executing on growth and capital returns.
Catalysts (what can move the stock higher)
- AI/Agentic product adoption: Enterprise AI rollouts (Agentforce/Customer 360 + embedded AI capabilities) could accelerate upsell and drive incremental ARR and margin expansion over the next 2-4 quarters.
- Capital returns: Continued buybacks and steady quarterly dividends (recent run of $0.416 per share declarations with pay dates including 01/08/2026) reduce share count and boost EPS per share.
- Execution beat in upcoming results: Any quarter that beats revenue or EPS expectations would likely trigger a re-rating given the stock's current valuation and investor appetite for durable SaaS cash flows.
- Macro tailwind for IT spending: An improving enterprise IT budget cycle or acceleration in digital transformation projects supports higher ARR and longer-term revenue visibility.
Actionable trade idea
This is a buy-on-dip trade idea with clear risk control and staged targets tied to re-rating scenarios.
- Trade direction: Long (reiterate buy)
- Time horizon: Position (6-12 months) - short-term recovery trade can complete earlier, but primary upside depends on re-rating and execution.
- Entry: 235-245 (scale in; if you already own, add on weakness inside this band).
- Stop: 210 (if price closes below this level on weekly timeframe, reassess thesis). This stop limits downside to roughly ~12% from a mid-entry of 240.
- Targets (staged):
- Target 1: 295 (near-term technical/earnings recovery; ~20-25% upside from mid-entry)
- Target 2: 335 (re-rating toward P/E ~50; ~38-40% upside)
- Target 3: 395 (longer-term, best-case re-rating to P/E 60+ if AI-led upside is realized; ~64%+ upside)
- Position sizing: Risk no more than 1-2% of portfolio value on the trade (i.e., size such that a stop loss to 210 equals 1-2% of total portfolio). Consider scaling into 3 tranches through the entry band.
Risks and counterarguments
The bullish case rests on continued execution and multiple re-rating. Here are the principal risks and at least one substantive counterargument to the buy thesis.
- Macro / multiple compression: If interest rates or risk premiums stay elevated, software multiples can stay compressed for many quarters. A re-rating to P/E 50+ is not guaranteed and could take longer than expected.
- Execution risk on AI monetization: Management must convert AI messaging into measurable product revenue and upsell. If customers push back on pricing or adoption is slower, realized uplift could be much lower than market hopes.
- Competition and churn: Large cloud vendors and point solutions are aggressively selling AI and data solutions; competitive pressure could force higher spending on R&D or go-to-market, pressuring margins.
- Accounting and cash-flow seasonality: Salesforce's cash flow and financing patterns can be lumpy quarter-to-quarter (we see variability in operating cash flow and financing outflows). If cash conversion weakens, capital-return plans could be scaled back.
- Counterargument - The stock is already pricing in best-case AI adoption: One could argue that the current valuation still assumes rapid AI-led revenue and margin expansion. If that optimism is misplaced, the stock can fall further even with steady SaaS fundamentals.
What would change my mind
I will revise from Buy to Neutral or Sell if any of the following occur:
- Material evidence that ARR growth is slowing below company guidance for two consecutive quarters (sustained sequential declines in revenue or weakening renewal rates).
- Management cuts dividend or pauses buybacks while still reporting healthy GAAP profits (signals capital allocation shift away from shareholder returns).
- Large, unexpected restructuring or acquisition that dilutes the earnings power or materially increases net leverage beyond the current long-term debt (~$8.436 billion).
Bottom line
Salesforce’s pullback to the low $240s is a tactical buying opportunity for disciplined investors. The company reported $10.236 billion in revenue and $1.887 billion in net income in the most recent quarter, with solid margins and recurring capital returns via dividends and buybacks. At roughly $232 billion implied market cap and TTM EPS of about $6.60, the stock trades in the mid-30s on a P/E basis; re-rating to a 45-60x multiple would push the stock into the $295-$395 range depending on execution. Enter 235-245, stop 210, and scale out at 295 / 335 / 395, while watching adoption metrics and cash returns closely.
Disclosure: This is a trade idea and not individualized investment advice. Position sizing and stops should be adjusted to your personal risk tolerance.
Key company dates (dividend): declaration 12/04/2025, ex-dividend 12/18/2025, pay date 01/08/2026.