Salesforce (CRM): Down 34% in 12 Months...

SAAS Apocalypse or a Buying Opportunity?

As of May 2026 I have 1 share os Salesforce (CRM). This article is for informational and educational purposes only and is not financial advice. Investing in stocks is risky.

The Fall of Salesforce

If you had been a Salesforce shareholder over the last 5 years, you’d be disappointed. Down 25%. While the boring S&P 500 Index was up 78% plus dividends. Ouch.

Over the last 12 months, the stock is down 35%.

When you look at the business, this can be confusing. The business has gotten stronger. Revenues have averaged 14% CAGR over the last 5 years, and margins have exploded.

Business is booming but the stock has gotten pummeled… Why? Because of moody Mr. Market. Mr. Market could see no wrong with Salesforce and the sky was the limit. For many years the P/E ratio stayed above 40 even reaching triple digits for a few years. But as the revenue growth slowed, and the recent the threat of AI, Mr. Markets mood has soured. The stock now trades at less than 20 times earnings. As the business has improved, the stock collapsed.

The past is the past. Now the question is: is it a good time to buy Salesforce?

My 3 Steps In Valuing a Business

Like my Adobe piece, I want to walk through how I think about investments using Salesforce as the case study, rather than write a traditional deep dive.

Several years ago, I worked as a data analyst, and the entire job ran through Salesforce. I started the day, opened Salesforce and never left. We would track files companies sent us and Salesforce managed the process the entire way. When there would was an error in our system, we would navigate Salesforce export the file and look through the data. Once I figured out what was wrong with the file, back to Salesforce to write what happened, fix it and send it on its way. The only three programs I used were Salesforce, Excel, and Tableau and I guess occasionally email. I saw how deeply the product was embedded in every workflow in the company. It felt like the company would go bankrupt before switching CRMs. That experience shaped how I think about this business more than any 10-K ever could, but of course I still read them.

So, this article is less about predicting whether AgentForce hits $5 billion or $10 billion in run rate by 2028. It’s about how I think about Salesforce as a business, and why I think it’s a great business at a fair price today, even though I’m not buying…. yet. (I do own 1 share to keep an eye on it, and I really like the business)

My investing process comes down to three steps:

1. Is it in my circle of competence?

2. Can I reasonably predict what the business looks like 5 to 10 years from now?

3. If yes to both, I attempt to value the business. (This is the fun part)

Now here is how I look at Salesforce. I will repeat some of the same lines from my Adobe article, as I think they are important to the thought process and how I stumbled into this framework.

1. Is It in My Circle of Competence?

The circle of competence comes from Warren Buffett. In his 1996 shareholder letter, he wrote: “What an investor needs is the ability to correctly evaluate selected businesses... You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.”

The Circle of competence idea is essentially how well do you understand the business.

Unlike Adobe, which sat on the perimeter of my circle, Salesforce is closer to the middle, but surely not in the middle. This is a complicated business it’s not like buying CROX or See’s Candies. However, I lived inside the product as a data analyst. I understand what it actually does at a customer’s desk, and I understand viscerally what would happen if a company tried to leave.

My Initial Thoughts

Before I ever open a 10-K or read an earnings call or do any research, I always think about what I already know about the business. Initially, my knowledge was just based on how I personally used Salesforce at work.

My Experience

When I think of Salesforce, it feels like a product with a giant moat. I used the Salesforce Classic version of Service Cloud every single day when I worked as a data analyst. It wasn’t just a software platform; it was literally the entire job. For eight hours a day, every single day, I was stuck in Service Cloud, tracking incoming data files, managing client info, and escalating system errors, while also using Excel and Tableau to support it. Having lived in those workflows, I felt the company would rather go bankrupt than try to switch CRM providers. Now that is a CRM with powerful switching costs. However, my knowledge stopped there. I had no idea how much subscription revenue it generated. I knew it was incredible software and a very sticky product, but that was about it.

The AI Threat

After the Salesforce stock drawdown, it seemed like there were two main AI storylines. First, the existential threat that AI will destroy all software companies including Salesforce. Second, AI will lower the number of seats at the table, which in turn will lower revenue for Salesforce. I will address both.

1. The existential threat in my mind is just classic human overreaction. Yes, some companies will go bankrupt and disappear because of AI, but there will be plenty of software companies that thrive in the AI era. Like in Game of Thrones in capitalism, you either win or you die. Having used Salesforce, I knew this this was not a realistic probability. Claude is amazing, but no giant Fortune 500 company is going to cancel Salesforce to have Claude AI agents run their CRM. Salesforce is too ingrained into all of their data to risk this for something that might not even be better or cheaper. Also, Salesforce is not just going to stand by and let AI agents take their business. They have deep pockets and can create their own product to match anything a competitor could try and spin up.

2. AI lowers the number of seats. This to me is a real question. When I wrote my Adobe article, this is something I was worried about with Adobe. If one person can do the work of ten with AI, does that lower Adobe’s revenue or at least slow growth? I am not sure for Adobe. With Salesforce, I think the simple answer is no. While some companies might need fewer employees using Salesforce, I would predict Salesforce could charge customers based on the number of clients or how big their CRM data needs to be. Or how often an employee uses their AI agent. With all these things considered, I just do not think companies are going to be able to reduce their CRM costs over time. If anything, as AI becomes more useful they might even pay more, or Salesforce can sell more add-on products that make their existing software even better.

The Verdict

Initially, I felt I knew the switching costs for Salesforce were high, and the product I was familiar with, Service Cloud sat squarely in my circle of competence. I didn’t have to guess what the user experience was like or pretend to understand the value proposition; I lived it for eight hours a day. The operational stickiness was a reality I observed firsthand, and the business was simple enough that I could analyze it thoroughly. However, I also knew this is a much larger business than just the part I was familiar with, and there was still a lot to learn about it. But I feel like I can genuinely understand this business. Now it was time to open the 10-K and learn more about the business.

The Research Phase

This is where the real work begins. I read the 10-Ks, earnings reports, and anything else I can find to understand the underlying business.

What is Salesforce?

Founded in a San Francisco apartment in 1999, Salesforce pioneered the software-as-a-service (SaaS) business model. Before Salesforce, enterprise software meant buying expensive on-premise servers, installing programs on individual hard drives, and paying massive upfront licensing fees. Salesforce moved the entire process to the internet, delivering Customer Relationship Management (CRM) software through a web browser on a recurring subscription basis.

Today, Salesforce is the central nervous system for modern corporate operations. For a Fortune 500 company, Salesforce acts as the absolute “system of record.” It tracks every interaction a business has with its customers, from the initial marketing click to the signed sales contract to the ongoing support tickets over the next decade.

The business operates on a classic “land and expand” enterprise strategy. They typically secure a contract with a single department and then systematically cross-sell additional software across the entire organization until the company’s entire revenue operation is dependent on the platform. Because the software houses a company’s most critical, proprietary data, the switching costs are notoriously high. Once integrated, customer churn is incredibly low, securing a highly predictable stream of annual recurring revenue.

To understand the economic engine of this $41.5 billion giant, we have to look directly at how it generates cash. Salesforce divides its business into two primary segments: Subscription and Support, which makes up roughly 95 percent of total revenue, and Professional Services, which accounts for the remaining 5 percent. The true value of the business lies entirely within that massive recurring subscription bucket.

Recently, Salesforce began an aggressive pivot, rebranding its core offerings under the “Agentforce” banner. This marks a structural shift in their business model. They are attempting to move away from charging fixed subscription fees per human employee (seat licenses) and toward a consumption-based model where they monetize the actual output of autonomous AI agents.

Here is the breakdown of those distinct cloud offerings and where the revenue is actually generated.

Service Cloud

It might surprise some people, but sales isn’t Salesforce’s biggest business anymore; service is. Bringing in $9.8 billion in fiscal 2026, Service Cloud stands as the largest single revenue generator for the company. This segment manages customer support routing, call center operations, and massive ticketing infrastructures. Having spent time working directly as a data analyst managing account data and system escalations within the Service Cloud platform, I can tell you firsthand that the operational gravity here is immense. When an enterprise embeds its entire customer service workflow, complex agent routing rules, and years of historical resolution data into this platform, ripping it out becomes a near-impossible task. Salesforce is currently leveraging this deep, sticky integration to pilot its new Agentforce workflows, attempting to transition legacy customer service desks from human-staffed seat licenses into autonomous AI workflows that resolve support tickets independently.

Sales Cloud

Sales Cloud is the historical bedrock of the company, closely following Service Cloud with $9.0 billion in revenue. This is the classic customer relationship management platform that everyone thinks of when they hear the name Salesforce. It tracks sales pipelines, automates lead generation, and dictates revenue forecasting. Sales Cloud holds the absolute system of record for a company’s commercial interactions, meaning that a corporation’s entire historical sales memory lives securely inside this database. Because it is tied directly to the frontline generation of cash for its clients, it remains one of the most resilient software architectures in the enterprise world. Migrating decades of proprietary client relationship data to a competitor involves an unbearable level of operational friction, which guarantees an incredibly stable revenue stream for the business.

Platform and Slack

The Platform and Other segment is the silent powerhouse of the business, capturing $8.9 billion in revenue last year. This segment includes Slack, which serves as the central communication hub for millions of workers, alongside the underlying low-code development environment that allows corporations to build bespoke internal applications. By providing the digital canvas for companies to build their own custom internal tools, Salesforce secures an entirely different layer of operational lock-in. When a business writes its own unique operational logic natively onto the Salesforce architecture, the software ceases to be a third-party tool and effectively becomes the company’s proprietary operating system. If you want to leave, you don’t just have to find a new CRM; you have to completely rebuild your entire internal app ecosystem from scratch.

Integration and Analytics

Integration and Analytics represents the connective tissue of the ecosystem, generating $6.2 billion in revenue. This segment is heavily driven by two historic acquisitions: MuleSoft, which provides the critical API plumbing to connect legacy on-premise corporate servers with modern cloud infrastructure, and Tableau, which visualizes all of that data for executive decision-making. This segment has been further fortified by their recent $8 billion acquisition of Informatica, an AI-powered data management platform designed to wire complex, distributed enterprise data directly into the Salesforce core. This connective tissue is vital because it feeds their hyperscale data engine, proving that Salesforce isn’t just a software layer anymore; it is increasingly positioned as the master data infrastructure for global enterprise operations.

Marketing and Commerce Cloud

Marketing and Commerce Cloud rounds out the core subscription offerings, bringing in roughly $5.4 billion by powering digital storefronts and automated, data-driven marketing campaigns. This cloud allows enterprises to seamlessly close the loop on their customer data. A company can take the precise insights and purchasing histories gathered in Sales and Service and use them to launch highly targeted, personalized advertising and consumer engagement strategies. It essentially turns the passive data stored in the CRM into an active weapon for revenue generation.

Professional Services

Finally, we have Professional Services, which accounts for the remaining $2.1 billion or so in revenue. You might look at this and wonder why a business doing over $40 billion in sales generates so little from implementation and consulting. Interestingly, Salesforce intentionally keeps this segment small relative to its massive scale. Instead of deploying an army of internal consultants to handle complex, messy enterprise installations, Salesforce routes the vast majority of implementation work to a global network of independent system integrators like Accenture and Deloitte. This strategy is brilliant. It keeps Salesforce’s operating margins remarkably clean, while outsourcing the heavy, expensive operational lifting to third-party partners. Those partners act as an aggressive distribution multiplier, ensuring the software is permanently and deeply wired into the client’s corporate DNA without Salesforce having to carry the headcount on its own balance sheet.

The “7 Powers” Framework

Warren Buffett often talks about the moat of a company. Every business is like a castle and in order to protect the castle you need a strong moat to keep competitors from storming in and taking your customers away.

Hamilton Helmer’s book 7 Powers takes Buffett’s castle and moat idea and breaks it down into seven specific strengths called powers. According to Helmer, every lasting business needs at least one of these powers. If it doesn’t have one, competitors will eventually wear it down and eat away at its profits. The more powers a company has, the bigger and stronger their moat.

The seven strategic powers are:

· Scale economies: producing at lower cost as volume grows

· Network effects: products that become more valuable as more people use them

· Counter positioning: taking a strategy incumbents can’t easily copy

· Switching costs: barriers that make customers hesitate to leave

· Brand: emotional connection and trust that support pricing power

· Cornered resource: exclusive access to something valuable

· Process power: unique ways of operating that are hard to replicate

Switching Costs

Salesforce’s switching costs are not just high. It is virtually impossible for a large enterprise to switch once they are locked in.

When a company adopts Salesforce, they don’t just install software. They build their entire revenue operation around it. Here is what gets embedded over time at a typical enterprise customer: Custom fields and objects, often hundreds or thousands of them, capturing data the business depends on. Apex code controlling business logic that engineers wrote years ago and have since left. Workflow automations, approval chains, and validation rules that touch every department. Permission structures defining who can see what. Page layouts customized for every role. Integrations connecting Salesforce to dozens of other systems. Reports and dashboards executives rely on daily. And critically, ten or twenty years of accumulated customer history that lives in Salesforce and nowhere else.

To switch, you don’t just buy a new CRM. You essentially rebuild your business. You re-architect every integration, rewrite every piece of automation, retrain every employee, migrate every piece of historical data (and inevitably lose some of it), and pray nothing breaks during the transition. While all of this is happening, your sales team is less productive, your customer service team is slower, and your finance team can’t close the books on time. The cost isn’t just the new software license. The real cost is the operational chaos during the transition and the very real risk that something breaks badly enough to lose customers or miss the quarter.

This is why companies stay. Salesforce might be the best, but they have strong competitors. HubSpot is arguably more user-friendly, and Microsoft Dynamics is arguably better integrated with the Office ecosystem. Ultimately, companies syay because the alternative is unthinkable. Having lived in these Service Cloud workflows for eight hours a day managing account data and system escalations at Benefitfocus, I have seen this from the inside; they would never switch from Salesforce. This sheer operational inertia is exactly why 90% of Fortune 500 companies use the platform and rarely, if ever, leave.

Network Economies

There are millions of developers globally who know how to build on the Salesforce platform. There are tens of thousands of consultants, system integrators, and admins whose entire careers depend on Salesforce. There is the AppExchange, Salesforce’s app marketplace, with thousands of pre-built apps that extend the platform. There are certifications, an annual conference (Dreamforce) that attracts well over 100,000 attendees, and entire university programs teaching Salesforce administration.

When you adopt Salesforce, you’re not just buying software; you’re plugging into this entire ecosystem. Need to add a feature? There’s probably an AppExchange app for it. Need to hire someone to administer your instance? There are millions of qualified candidates. Need a consultant to help with a migration or a new implementation? Accenture, Deloitte, IBM, and Infosys all have massive Salesforce practices employing tens of thousands of consultants.

Compare this to a smaller competitor. Even if HubSpot or Microsoft Dynamics has technically equivalent features for your use case, the ecosystem is much thinner. Fewer developers, fewer pre-built integrations, fewer specialists to hire. For the 90% of Fortune 500 companies that demand deep, complex customization, this network advantage is an enormous, self-reinforcing moat.

Scale Economies

Backed by over $41.5 billion in total revenue, Salesforce weaponizes a $14 billion sales machine and a $6 billion R&D budget to build and distribute new infrastructure at a scale smaller competitors simply cannot match.

Agentforce is a perfect example. Building a production-grade AI agent platform that integrates with all the existing Salesforce clouds, handles enterprise security and compliance, supports multiple languages, and can be customized by the army of Salesforce admins is something that took thousands of engineers years to build. A smaller competitor simply cannot match this. They can build pieces of it, but not the integrated whole.

The same advantage applies to sales and marketing. Salesforce employs roughly 15,000 salespeople globally. They sponsor every major enterprise tech conference. They have relationships with virtually every Fortune 500 CIO. A smaller competitor cannot afford this go-to-market infrastructure, which means even if they have a better product, they often can’t get in front of the right buyers.

Branding

Under Hamilton Helmer’s strict definition, Branding requires a company to command a pricing premium based purely on an emotional attachment or identity (think Apple or Tiffany & Co.). Salesforce does not have that; customers regularly grumble about how expensive the licenses are.

However, we are counting it as a “half-power” here because their brand acts as a massive, risk-mitigating moat in enterprise procurement. Marc Benioff is a celebrity CEO, Dreamforce is a major event on the enterprise calendar, and “Salesforce” has become a generic term for enterprise CRM. For a corporate buyer, it instills absolute peace of mind. To put it simply: nobody gets fired for buying Salesforce. When 90% of the Fortune 500 already relies on the platform, choosing Salesforce is no longer a technology decision; it is the unquestioned corporate standard.

Where Salesforce Lacks Power

To run a truly objective analysis, we also have to look at the powers Salesforce does not possess:

• Cornered Resource: It is tempting to point to the massive trove of enterprise data sitting on their servers and call it a cornered resource. But Salesforce doesn’t own that data; the clients do. Salesforce also doesn’t own a monopoly on software engineering talent or proprietary algorithms that cannot be replicated elsewhere.

• Process Power: While their enterprise B2B sales playbook is elite, it is ultimately replicable. They do not possess a deeply embedded, evolutionary operational advantage (like the Toyota Production System) that inherently gives them lower internal costs than their competitors. They just spend more money to execute better.

• Counter-Positioning: Decades ago, Salesforce brilliantly counter-positioned against Oracle by pioneering the Cloud delivery model. Today, they are the legacy incumbent. They cannot counter-position anymore; instead, they are actively being counter-positioned against by nimble AI startups and HubSpot.

The Financial Reality: Why the Moat Matters

To understand just how dominant this company is, you have to look at the math. The structural advantages of switching costs and network effects do not just create a good product; they create a highly predictable financial fortress. The numbers tell the true story of this lock-in:

• Unrivaled Market Penetration: An incredible 90% of Fortune 500 companies run on Salesforce. When you look at the absolute largest enterprises, the grip is even tighter, with nearly 50% of the Fortune 100 already adopting their newer AI and Data Cloud solutions.

• Market Share Dominance: Salesforce controls roughly 21% of the global CRM market. To put that in perspective, they generate more CRM revenue than their closest competitors (Microsoft, Oracle, SAP, and Adobe) combined, and they have held the number one market position for 12 consecutive years.

• Massive Cash Generation: In Fiscal Year 2026, the company generated $41.5 billion in top-line revenue. Because of the capital-light nature of their software delivery once a customer is secured, this translates to $15 billion in annual operating cash flow.

• Margin Expansion: Over the last two years, Salesforce has aggressively pivoted from a “growth at all costs” mentality to a strict focus on profitability, rapidly expanding their non-GAAP operating margins to north of 34%.

• Contracted Backlog (RPO): Perhaps the most important metric for evaluating switching costs is Remaining Performance Obligation (RPO), which measures contracted revenue that has not yet been billed or recognized. Salesforce’s total RPO crossed $72 billion at the end of FY2026, up 14% year-over-year. currently sits at nearly $60 billion. That is over $72 billion of legally binding, future revenue locked in by corporate customers who cannot afford to leave.

• Shareholder Returns: They are using this massive free cash flow to aggressively buy back stock, recently authorizing a new $50 billion share repurchase program that replaces all previously unused authorizations. In March 2026, Salesforce launched a $25 billion accelerated share repurchase the largest ASR in history executing half of that authorization upfront and signaling unusually high conviction from management about how cheap the stock is right now.

The Verdict on the Moat

This is an incredible business. Salesforce currently holds roughly 21% global CRM market share, which is larger than the next four competitors (Microsoft, HubSpot, Oracle, and Adobe) combined.

It’s not completely invincible. HubSpot is winning in the SMB and lower mid-market, growing 20% to 25% annually while Salesforce grows at 9%. Microsoft Dynamics is gaining ground in enterprises heavily committed to the Microsoft stack. Startups are nibbling at vertical-specific AI use cases.

But at the high end of the market, where the deals are biggest and the switching costs are highest, Salesforce is the undisputed king. We have analyzed other companies on this Substack that technically possess more of the 7 Powers, giving them what you might call a “wider” moat. But the powers Salesforce does have are so structurally overwhelming that they create an incredibly deep, powerful moat filled with sharks, reinforced by massive walls, and guarded by an army at the top. The King or Queen sleeps easy in this castle, completely secure against the siege of AI and competitors trying to tear it down.

The AI Questions

After doing the research, we can come back to the AI questions.

Will AI destroy Salesforce?

Simply put: no. While AI-native startups might peel away some smaller customers at the fringes of the market, Salesforce’s grip on the overall enterprise segment remains entirely intact.

Will AI reduce seat counts and lower revenue?

It is highly likely that AI will reduce the absolute number of seats needed to operate within Salesforce, or at the very least, limit future seat growth. However, I do not believe this will translate to a decline in revenue.

Salesforce has already anticipated this shift and is aggressively pivoting toward an agent and usage-based pricing model. As the platform becomes exponentially more powerful, large Fortune 500 companies will ultimately pay more for Salesforce over time based on the sheer output and efficiency it generates, rather than paying per human user. Therefore, rather than being an existential threat, AI is shaping up to be a massive structural tailwind.

2. Can I Reasonably Predict What the Business Looks Like in 5 to 10 Years?

This is where Salesforce differs from Adobe. While Adobe’s Creative Cloud future is genuinely cloudy because of AI, I think I can paint a reasonable picture of where Salesforce is going.

The base business (Sales Cloud, Service Cloud, Marketing Cloud, Data Cloud) is going to be here in 10 years. There is essentially zero chance that a majority of the Fortune 500 customers running on Salesforce today are running on a competitor in 2036. The switching costs are too high. The integrations are too deep. The data is too entrenched. These customers will still be paying Salesforce in 10 years and probably paying more than they pay today.

Now the question is growth. There are three main growth levers:

The first lever is new customer acquisition. This is getting harder. The high end of the market is largely saturated. Most Fortune 500 companies that are going to buy Salesforce have already bought it. Growth from new logos has to come from mid-market customers, where they compete harder against HubSpot, and from international markets, which are growing but smaller.

The second lever is price increases on existing customers. This is reliable but limited. Salesforce raised list prices roughly 9% in 2023, their first major price hike in seven years. You can only do that so often before customers push back. Probably good for 2% to 4% annually on average.

The third lever is their best chance. This is selling more products to existing customers, the classic “land and expand” motion. This is the Agentforce story. If Salesforce can convince their existing customers to buy Agentforce on top of what they already have, growth accelerates. If they cannot, growth likely slows. On top of this just continuing to create add ons customers wants.

The Financial Baseline

Before modeling out the future, we have to ground our assumptions in the company’s current financial reality. Over the past two years, Salesforce has undergone a fundamental transition from a hyper-growth software company to a highly profitable free-cash-flow machine.

For fiscal year 2026, Salesforce reported $41.5 billion in total revenue, representing roughly 10% year-over-year growth. This is a noticeable downshift from the 20% to 25% annual revenue growth they consistently posted just a few years ago. This deceleration directly aligns with the saturated new customer acquisition lever. However, what management lost in top-line acceleration, they more than made up for in strict cost discipline and profitability.

Following pressure from value-oriented investors, Salesforce aggressively pivoted to focus on the bottom line. For fiscal 2026, the company achieved a non-GAAP operating margin of 34.1%. This expanding margin profile translated directly into $14.4 billion in free cash flow for the year.

Perhaps most importantly for our net income growth models, Salesforce is aggressively returning that capital to shareholders. Last year, they returned 99% of their free cash flow, including $12.7 billion in stock buybacks and another $1.6 billion in dividends. They recently authorized a new $50 billion share repurchase program, ensuring a consistent reduction in the outstanding share count.

With this baseline established, combining roughly 10% top-line growth, mid-30s operating margins, and aggressive share count reductions, we attempt to predict future growth. What’s mor important though is thinking about the business and er think it’s likely to get better and grow revnenue.

Here are my three scenarios:

The Bull Case: 11% Net Income Growth

In this world, Agentforce is the real deal. Enterprises adopt AI agents at scale, and Salesforce captures most of that spending because the agents need access to the customer data that already lives in Salesforce. Data Cloud, now strengthened by the Informatica acquisition, becomes the system of record for enterprise AI, and Salesforce charges for both seats and consumption.

Revenue grows around 10%. Margins continue to expand as software businesses tend to do at scale. Buybacks reduce the share count by 2% to 3% per year. Net income grows roughly 11% per year.

Revenue in Q4 grew 10% in constant currency 11% is attainable.

The Base Case: 7% Net Income Growth

The base business keeps humming along. Sales Cloud and Service Cloud growth slows to roughly mid-single digits as the market matures. Marketing Cloud loses some ground to HubSpot in the mid-market. Data Cloud and Agentforce add growth on top without being transformative.

Revenue grows roughly 7% per year. Margins remain constant. Buybacks add another 2% to 3%. Net income grows around 7% annually.

Compounding earnings at 7%, combined with a 5% starting earnings yield, isn’t exciting but it’s likely to beat the market.

The Bear Case: 3% Net Income Growth

In this scenario, Agentforce underwhelms. It generates real revenue, but not enough to offset the slowdown in the core. HubSpot keeps taking share in the mid-market. Microsoft Dynamics wins more deals where the customer is heavily committed to the Microsoft stack. Maybe a recession hits and enterprise software spending slows.

Revenue growth drops to 3% to 5% annually. Margins compress slightly as Salesforce has to spend more on R&D and sales to keep up. Buybacks still help. Net income grows roughly 3% annually.

I do not see a worst case much worse than this. The base business is too sticky. Even in a tough macro environment, customers do not leave. They might delay expansion, they might cut seats during layoffs, but they are not ripping out Salesforce. This is a meaningful contrast with Adobe. With Adobe, the worst case includes the possibility that AI fundamentally disrupts Creative Cloud and the business actually shrinks. With Salesforce, I have a much harder time imagining the business shrinking. The customer lock-in is just too strong. However maybe I’m overestimating Salesforces moat.

3. Valuing the Business

Great, now for the fun part. Valuing the business. This is always the most enjoyable part of the process for me, and in a lot of ways, it is more art than science. This is where most investors who underperform the market struggle.

To value the stock you must value the business. Thank you Charlie Munger. And to quote Warren Buffett: “The value of a business is the cash it will produce from today until judgment day discounted back at a proper rate.” This is a discounted cash flow. However, Charlie Munger once revealed that in all the years he knew Warren he never saw him actually calculate one of those models.

The Philosophy: No Excel or Calculators Needed

I am in the same boat as Warren and Charlie. If you need Excel to tell you if it is a good investment it is not good enough. Keep looking. I say this as someone who was a math major and holds a Masters in Finance and graduated Beta Gamma Sigma. I am very comfortable with the math and have built hundreds of discounted cash flow models in my life. I am not knocking people who use them, but they are just not for me. The problem is that I can make any company look good in a spreadsheet. If you tweak the terminal growth rate by one percent or the discount rate by a fraction of a percent, the entire valuation changes. Predicting cash flows ten years from now is extremely difficult let alone predicting them forever.

While I do not use models to make investment decisions, I do use two different models for fun. One is very similar to a standard DCF model but it is a simplified to look at just the next decade. I do not actually create this one this is just in my head but I will demonstrate it later. The other factors in net income growth, share count reduction and a range for the P/E ratio over time.

But first, valuing Salesforce. Typically, I look at what is left over for investors today which Warren Buffett calls owner earnings. However, owner earnings for Salesforce is incredibly difficult because they are a serial acquirer. Just this year they spent roughly 9.6 billion dollars on acquisitions.

This brings up a massive debate. Is that 9.6 billion dollars required maintenance capital to keep their competitive moat intact, or is it optional growth capital? If a company has to constantly buy companies just to survive and hide a deteriorating core product their true cash flow is virtually zero. I don’t believe this si the case for Salesforce but it is still something to consider. Let’s pull up the Income Statement and Statement of Cash Flows to explain.

First off I Love this Income Statement from Salesforce. It breaks down the cost of revenue between the two categories they report revenue for: subscription and professional services. Then below the typical income statement they include the cost details of the footnotes. This is beautiful and raises the value of the business to me in a small but real way. You want honest managers.

Looking at the income statement, you can see how good of a business this is. $41.5B in revenue, gross profit of $32.3B for a 76% gross profit margin percent. Operating income of 8.3B for an operating margin of 20%. Due to a gain of 1B in strategic investments Net Income is 7.5B after taxes. If you assume 20% tax rate on the 8.3B operating income normalized net income is more like 6.6B. I personally like that number a little better than the 7.5B. As you can see from the previous years those strategic investments were negative I wouldn’t count on the 1B gain every year. You can also see the number of outstanding shares dropping the last few years, that tends to be a good sign.

Typically, Owner Earnings are less than Net Income. The Owner Earnings formula I use from Buffett is Net Income + Depreciation & Amortization – Capex. Let’s look at the statement of Cash Flows.

First off, we see 3.5B in stock-based compensation, no chance we are adding that to our Owner Earnings. Some people like to look at free cash flow yield and add that back in, but SBC is a real expense. We also have a depreciation and amortization line for 3.6B and an amortization of cost capitalized line of 2.2B. The amortization of cost capitalized is related to cost capitalized to obtain revenue and shows up change in assets below. We are not going to add this in. So, looking at this we would get about 10.4B in owner earnings. (Net Income + D&A – Cap ex) However, most of the D&A is related to purchasing businesses, and you can see Salesforce spent 9.3B in business combinations last year alone. So, the question then becomes: are these business acquisitions adding value to the company, or are they needed just to maintain their current business position? Salesforce does have a good reputation for buying business (Tableau, Slack, Mulesoft) but I think it’s fair to say some money will be wasted. When trying to determine the true economic earnings for the business, it’s probably fair to say it’s somewhere between the normalized earnings of 6.6B and the calculated owner earnings of 10.4B. For simplicity and to be conservative let’s use that net income number but understand it is probably a conservative number.

For fiscal 2026, Salesforce reported roughly 7.5 billion dollars in Net Income. The stock currently trades at 177 dollars per share giving it a market cap of roughly 143 billion dollars. Dividing that market cap by the 7.5 billion dollars in net income gives the business a price to earnings multiple of 19 times. That translates to an earnings yield of 5.2 percent.

Compare this to the general market S&P 500, which currently trades at rough;y 30 times earnings for a yield of just 3.3 percent. Even using the highly conservative net income baseline, Salesforce is trading significantly cheaper than the broader market. It seems likely that Salesforce will also grow faster than the broader market while buying back shares.

So, then it becomes a conceptual exercise. I am buying a business with a 5.2 percent yield right now. Is income likely to grow? The answer is yes, as they raise prices and push Agentforce. What about the shares? Salesforce issues a massive amount of stock for employees, but they are actively fighting this by authorizing 50 billion dollars in stock buybacks. A portion of this cash will be burned to mop up the dilution but the remaining billions will actively shrink the total share count, returning real value to the owners.

When looking at stocks, Buffett talks about printing the coupon of the stock. Bonds have coupons attached to them, but when it comes to stocks it is the investors job to figure out what that coupon is going to be over time. From this I always view buying stocks as if I am buying the entire business and the stock market did not exist. If I bought Salesforce today, I get that 5.2 percent return on my investment on day one. Even in a bear case scenario that yield will increase over time due to the buyback program and modest income growth. I feel very comfortable saying this investment coupon will earn high single digit to low double digit annual returns over the long term.

Opportunity Costs

After you get this far, you have to ask: Is this good enough to buy? This comes down to the most misunderstood concept in investing: opportunity costs. Charlie Munger described it perfectly when he asked why he would put money in his tenth best idea when his best is available. I have taken this to heart. I have frequently had 90 percent of my portfolio in a single stock because it was my best idea.

We simply have to weigh it against the alternatives. If your best alternative is a 4 percent risk free bond, Salesforce is undervalued. I am getting a superior yield on day one with an asset that will increase its cash output over time.

If your opportunity cost is the S&P 500 it is still a very clear decision. I am confident the S&P 500 will grow earnings at a minimum of 4 percent long term. The downside is limited because it is diversified. On the other hand it is much more expensive at a 3.3 percent yield compared to the 5.2 percent net income yield of Salesforce. In likely scenarios Salesforce will outperform the S&P 500 from this starting valuation. Of course, maybe I am wrong and AI is a huge threat to Salesforce that destroys the business and the stock goes to 0. However, I believe buying it today at 19 times earnings provides a comfortable margin of safety against the broader market.

But it is not enough for Salesforce to be cheap relative to the S&P 500; it has to be cheaper than my best ideas.

My best idea currently is Evolution AB (EVVTY) which offers a 8.5 percent earnings yield. The downside is protected because this business is not going away; gambling is one of the oldest industries in history. The upside is also probably higher. Because Evolution is trading so cheaply at 12 times earnings, their buybacks are far more effective at reducing share count. Because Salesforce yields 5.2 percent it simply does not clear the 8.5 percent hurdle rate set by Evolution AB.

The other major hurdle Salesforce has to clear is Crocs (CROX). Currently trading at roughly 8 times earnings Crocs offers an earnings yield of roughly 12.5 percent. Even if we assume Crocs has zero growth going forward, that starting yield is so massive that it provides a huge cushion. It would take Salesforce years of compounding just to catch up to the current earnings yield Crocs is generating today. Salesforce has infinitely more enterprise stability than a footwear brand, but I understand selling shoes perfectly. It is cheaper and fits my circle of competence.

What Price to Buy?

So where would Salesforce get me interested? This one is tough because the net income number likely understates the true earnings power of the company. And at a 5.2 percent net income yield you are getting a monopoly quality business with ironclad switching costs at a very fair price. The likelihood of permanent capital loss here is incredibly close to zero. (Again, I acknowledge maybe I am drastically wrong about AI, but I don’t think so)

However, it always comes down to opportunity costs. Because my capital is currently deployed in assets yielding 8.5 percent and 12.5 percent I will stay on the sidelines. Salesforce doesn’t need to be at a 12.5% earnings yield for me to buy because I think it’s a superior business to CROX but it needs to be higher than the current yield. Again, a lot of this is more art than science there’s not an exact price; an investment should be so good there’s no need for calculations. With 7.5B in Net Income and 10B in Owner earnings I would love to buy the stock at $75-100B market cap. With 820M shares outstanding that puts my price between $91-121. At $177 a share I think this is currently a great business at a fair price that is likely to beat the market and produce satisfactory results over time.

My Financial Models

The Stock Bond Model

This model is not one I actually make but a mental model I use when attempting to print a stock’s coupon as Buffett would say. It is very similar to a discounted cash flow model but it just looks 10 years into the future. I don’t adjust for inflation, which is obviously a real cost.

The three scenarios I outlined earlier for Salesforce are:

· Bear – (3% Net Income Growth, 3% Buybacks)

· Base – (7% Net Income Growth, 3% Buybacks)

· Bull – (11% Net Income Growth, 3% Buybacks)

You can see even in the low growth bear scenario, the stock is almost a 7% coupon which is much better than the current 4.5% treasury yield. If Salesforce continues to grow at 11% and buyback 3% a year it turns into a 10% coupon which is very nice in the current environment.

Now to illustrate opportunity cost I have included my two largest investments below: EVVTY and CROX. While I believe Salesforce is probably the best business of the three and might grow the fastest, you can see the bear case in both of these stocks is better than Salesforce’s best case.

However, the 7.5B Net Income number is likely conservative. Lets run it through the model with 10B in owner earnings.

With the coupons now between 8.86% and 13.17% this is closer to our best two options. With Salesforce being a superior business, we are also willing to pay up but not quite this much. The close Salesforce gets to $120 a share the more we like it.

The Excel Model with Mr. Market

This next one I actually build in Excel, but again, just for fun. It uses the same growth assumptions, only this time it factors in Mr. Market and his crazy moody swings in PE ratio. Ben Graham’s old parable still holds. Mr. Market is your manic depressive business partner who shows up every day offering to buy your share or sell you his at wildly different prices depending on his mood. The first model assumed Mr. Market was on lithium and left the multiple alone. The second model lets him swing.

Taking Mr. Market into account, you can see the worst case actually dips negative at -0.6%, while the best clocks in at 17.4%. I believe the buyback assumption is conservative. The $50 billion repurchase authorization could support a net buyback higher than 3% over time, but I am keeping the model conservative to account for the heavy stock based compensation Salesforce hands out every year.

Now look at the shape of this distribution. The worst case is mildly negative, which is materially worse than Crocs and Evolution’s worst-case scenarios. To get there, you have to assume net income grows at only 3% per year for a decade while the multiple compresses from 19 all the way down to 10 times. For context, the lowest P/E Salesforce has traded at in the last decade is right now 19. To compress to 10 you would need AI to materially impair the business and the market to permanently de-rate enterprise software at the same time. Possible, but it is a stretch. Mr. Market’s mood isn’t something I ever try to guess. The medium case lands at 8.9%, which is a perfectly respectable long-term equity return on its own especially for a business with this much downside protection. Across every cell of the grid, Evolution beats Salesforce. That is exactly why my capital sits there and not here, even though Salesforce is probably the higher quality business.

Wrapping Up Salesforce

Salesforce is currently a fantastic business at a fair price. They have an impenetrable moat consisting of high switching costs scale economies and massive network effects. Having personally worked inside Service Cloud I know exactly how deep these hooks go into an organization. You do not just cancel your Salesforce contract; you would have to halt your entire corporate operation.

At a 5.2 percent earnings yield, Salesforce is highly likely to beat the market. The downside is heavily protected by the sheer operational inertia of their Fortune 500 customers and a cash engine that produces enough yield to comfortably offset employee dilution while still retiring shares. While my other opportunities like Evolution AB and Crocs keep me from allocating capital here today anyone buying Salesforce at $177 a share is acquiring an elite enterprise compounding machine at a decent price. I’d love to by the stock around 100B market cap or $121 a share.

Disclaimer

Disclosure: At the time of this writing, I have 1 share of Salesforce (CRM). This article is for informational and educational purposes only and should not be construed as professional financial advice.

Investing in individual stocks involves significant risk, including the potential loss of principal. I am not a registered investment advisor or a broker-dealer. Readers should conduct their own due diligence or consult with a qualified financial professional before making any investment decisions. While I strive for accuracy, all data is provided “as is” and is subject to change without notice.