Salesforce stock is a buy despite negative sales and continued cost cutting

Salesforce (NYSE:mRCC) stock underperformed in 2024, down more than 3% as company budgets shifted to hardware investments from enterprise software.

The cloud-based software leader specializes in customer relationship management solutions — hence the Salesforce ticker — has trailed many of its big-cap tech peers in recent years.

As a result, Salesforce is working to reduce costs while continuing to invest in new products. In mid-July, Salesforce cut about 300 jobs in its search for the right balance between innovation and austerity.

“Like any healthy business, we are continually evaluating whether we have the right structure to best serve our customers and fuel areas of growth.” Bloomberg reported comments from a spokesperson. “In some cases, that leads to the elimination of roles.”

Combined with 700 jobs earlier this year and 8,000 in January 2023, it has declined by 9,000 over the past two years, or about 11% of the total workforce at the end of 2022.

Has the bleeding stopped? Is now the time to buy? May be. Here are three reasons why.

What to expect from its Q2 2025 results?

Salesforce will report Q2 FY25 results on August 28 after markets close. The average earnings estimate of the 37 analysts that provide one is $2.36 per share, up about 11% from Q2 FY24. The revenue estimate from 35 analysts is $9.23 billion, up 7% from $8.60 billion a year earlier, about 400 basis points short of Q2 FY24 revenue growth. The company’s guidance for Q2 FY25 is $9.25 billion in the mid-point, identical to the Wall Street consensus estimate.

Salesforce expects full-year 2025 revenue of $37.85 billion, up 8.5% from 2024. That’s 250 basis points less than it generated last year. So its business faces headwinds in 2025, and the staff cuts reflect that.

In terms of profitability, a non-GAAP operating margin of 32.5% is expected in 2025, 200 basis points higher than in 2024.

Despite a 250 basis point slowdown in revenue growth in 2025, it is still expected to generate operating profits of $12.30 billion this year, up from $10.64 billion in 2024, a gain of nearly 16 %.

So life isn’t miserable for CEO and founder Marc Benioff.

Where is the focus?

Profitability remains vital to its success. A company will not have the capital to grow its business without profit and cash flow. Fortunately, CRM profits are not the problem.

“Our profitable growth trajectory continues to generate strong cash flow. Q1 operating cash flow was $6.25 billion, up 39% from last year. Free cash flow in the first quarter was $6.1 billion, up 43% year-over-year,” Benioff said in his Q1 2025 press release.

“We are at the beginning of a massive opportunity for our customers to connect with their customers in a whole new way with AI. As the #1 AI CRM in the world, we are incredibly well positioned to help companies realize the promise of AI over the next decade.”

Before we get into AI and its role in Salesforce’s growth, let’s talk briefly about free cash flow generation.

In 2024, it generated free cash flow of $9.50 billion, 50% higher than in 2023. In 2025, assuming its 43% growth from the first quarter holds throughout the year, it will generate $13.59 billion this year. That’s a free cash flow margin of nearly 36%. I don’t mind those numbers.

Based on the current enterprise value of $227.44 billion, it has a free cash flow yield of 6.0%. Anything between 4% and 8% is fair value and above 8% is undervalued.

How much will AI contribute to his business?

Like most tech businesses, this is the billion dollar question. In the case of Salesforce, it created the Einstein 1 platform with Einstein Copilot. It integrates a generative AI assistant into all its applications.

“Salesforce prices Copilots based on seats and a specific usage element. We believe Copilot’s revenue impact will be more significant in fiscal 2026 and less in fiscal 2025. In the long term, Copilots could impact seat growth.” Investors’ business day reported comments from BMO Capital Markets analyst Keith Bachman in late July.

“Therefore, like many software companies, Salesforce will likely evaluate changing pricing models to include value or usage rather than just seats.”

As it uses artificial intelligence in its business model in fiscal 2025, it has chosen to slow acquisitions and improve profits to appease activist investors.

In addition, and this is related to the increase in its free cash flow, it paid its first dividend of 40 cents per share in April. Its annual rate of $1.60 yields 0.7%. Stock repurchase programs from 2022 through 2024 created $30 billion in future repurchases without expiration. Of these, he still has $16.2 billion.

For now, it won’t matter what he does with the AI. CRM’s capital allocation practices have become very shareholder friendly.

As of the date of publication, Will Ashworth did not hold (either directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

At the time of publication, the responsible editor had (either directly or indirectly) no position in the securities mentioned in this article.