Salesforce's Second-Quarter Leading Indicators Improved, but Second-Half Execution Will Still Determine Whether Growth Improvement Can Be Sustained

Overview

The report reviews Salesforce's second-quarter results, focusing on whether improving cRPO, Agentforce commercialization, and customer behavior can support a reacceleration in second-half growth. Morgan Stanley believes the results represent a step in the right direction, but headwinds from legacy products and the sustainability of organic growth remain unresolved. It therefore raises the price target while maintaining an Equal-weight rating.

Core views

The most important second-quarter improvement came from leading demand indicators. Constant-currency cRPO grew 14%, approximately 1 percentage point above company guidance, after essentially only meeting guidance in the prior two quarters. Third-quarter constant-currency cRPO guidance is also approximately 14%, above the market expectation of approximately 13%, and excludes Contentful and Fin. This supports a reacceleration from the second quarter's 11% constant-currency subscription revenue growth, including approximately 6% organic growth. The midpoint of FY27 revenue guidance was raised by $200M, or approximately 40 basis points, with $100M contributed by organic improvement, $200M by Contentful and Fin, and a $100M foreign-exchange headwind. Given that second-quarter revenue exceeded market expectations by only approximately $20M, the report views the organic guidance increase as a more constructive signal rather than simply a carry-forward of the quarter's outperformance. AI commercialization data further eased market concerns that AI could replace traditional SaaS. Agentforce ARR exceeded $1.5B, with year-over-year growth accelerating from 205% in the first quarter to more than 240%; even excluding changes in product scope, growth continued to accelerate. Agentic Work Units reached 3.2B, up 97% sequentially, while bookings for premium Agentforce SKUs more than doubled quarter over quarter. Agentforce asset bookings doubled year over year and maintained triple-digit growth, with 50% coming from existing customers purchasing additional capacity, indicating that customers have begun expanding actual usage. Another 2,000 paying customers entered production in the second quarter, up 70% sequentially. The report also notes that 9 of the world's top 10 AI companies use Salesforce and Slack, with related spending growing 435% year over year. This indicates that frontier model companies still tend to leverage Salesforce's existing data, permissions, and workflow layer rather than rebuilding an entire CRM system themselves. Customer behavior also shows no evidence that the platform is being rapidly displaced. Net new AOV growth reached a four-year high, and net new AOV growth in the first half significantly exceeded overall AOV growth. Customer attrition remained near historical lows, contract durations for new signings and renewals lengthened across all business segments, and seat counts for Sales, Service, and Slack all increased year over year. These data support the view that Salesforce retains a relatively durable moat in enterprise distribution, systems of record, and governed workflows, while also reducing the likelihood that enterprises will bypass Salesforce entirely by building their own AI CRM solutions. The Headless partnership model expands Salesforce's reach: external models handle reasoning, while Salesforce provides governed data, workflows, business logic, and execution capabilities. The initial products were launched as sales plugins containing 37 skills. The report believes this model can leverage mainstream AI interfaces to broaden distribution while allowing Salesforce to remain the enterprise system of record and control plane, thereby reaching a broader audience beyond traditional Salesforce users. However, whether this model can generate sustained monetization sufficient to drive overall company growth remains under validation. Positive indicators have not yet fully resolved second-half execution risks. Second-quarter organic constant-currency subscription revenue growth slowed from approximately 7% in the first quarter to approximately 6%, indicating that actual revenue continued to decelerate. Marketing has begun showing signs of recovery after years of platform restructuring, but management believes it is still too early to determine whether the improvement is sustainable. Commerce product innovation has improved, but adoption cycles are longer, and management expects its recovery to lag Marketing by “several quarters.” Integration & Analytics continues to face pressure from license revenue and volatility in bookings, while prior weakness in MuleSoft and Tableau bookings and renewals has not been clearly resolved. As Informatica's inorganic contribution enters the year-over-year comparison base in the fourth quarter, it will become more difficult to separate Informatica's improvement from growth in Salesforce's core business. Profitability was solid but insufficient on its own to drive a valuation rerating. Second-quarter non-GAAP operating margin was 34.1%, approximately 30 basis points above market expectations. FY27 margin guidance remains at 34.3%, so the valuation discussion continues to depend on growth rather than current-period margins. Over the longer term, the report believes there is still room for operating leverage after the current investment cycle ends, but without a clear improvement in growth, a valuation of approximately 28 times Morgan Stanley's CY27 GAAP earnings estimate reflects a relatively balanced risk-reward profile. Share repurchases provide some support: the $25B accelerated share repurchase program initially delivered 103M shares, with final settlement expected in October, and management expects to repurchase at least 14% of shares outstanding. On valuation, Morgan Stanley raised its price target from $185 to $235 due to multiple expansion among comparable companies, while maintaining its Equal-weight rating. The report states that the stock trades at approximately 12 times CY27 free cash flow based on its estimates. The $235 base case applies an approximately 12 times multiple to FY29e free cash flow per share of approximately $22, discounts it back at an approximately 10% discount rate, and incorporates the report's stated net cash adjustment of ($13) per share. The base case assumes an approximately 10% revenue CAGR from FY26 to FY29 and an FY29 operating margin of approximately 36%. The target price implies approximately 29 times GAAP EPS, broadly in line with large-cap software peers with similar growth profiles. The bull-case target is $350: rapid adoption of Agentforce and Data Cloud, along with improving renewal rates, drives an approximately 15% revenue CAGR from FY26 to FY29, an FY29 operating margin of approximately 39%, and an approximately 20% free cash flow CAGR, with a 14 times EV/FCF multiple. The scenario heading corresponds to FY29e free cash flow of approximately $23B. The bear-case target is $90: AI-native competitors prompt customers to adopt internally built solutions, customer attrition rises, revenue growth falls to the mid-single digits over the next three years, and incremental investment leaves FY29 margins only in the mid-30% range, with a 6 times FY29 EV/FCF multiple. The scenario heading corresponds to FY29e free cash flow of approximately $15B. The base-case heading corresponds to 12 times FY29e free cash flow of approximately $18B. The differences among the scenarios indicate that the key valuation driver is not whether AI products attract attention, but whether they can sustainably offset headwinds from the legacy product portfolio and deliver a verifiable reacceleration in organic growth.

Analysis framework

The report first compares actual second-quarter results and company guidance with market consensus expectations, using metrics such as cRPO, subscription revenue, and AOV to assess the direction of future revenue. It then uses Agentforce ARR, usage, bookings, production customer counts, and renewal behavior to evaluate AI commercialization and displacement risks, before analyzing the contribution or drag from Marketing, Commerce, MuleSoft, Tableau, and Informatica on organic growth. Finally, the report combines margins, free cash flow, comparable-company multiples, and an approximately 10% discount rate to construct bull, base, and bear valuation scenarios and adjusts the price target accordingly.

Methodology notes

• Valuation Methodology

  EV/FCF Multiples and Discounted Valuation

  The report multiplies forecast-period free cash flow by different EV/FCF multiples and then discounts the resulting values back at an approximately 10% discount rate to derive the three valuation scenarios of $350, $235, and $90.

• Valuation Methodology

  Bull, Base, and Bear Scenario Analysis

  The report illustrates how different operating outcomes affect the price target by varying assumptions for revenue growth, AI adoption, customer attrition, margins, and valuation multiples.

• Event Trading and Behavioral FinanceEvent-driven analysis

  Comparison of Results, Guidance, and Consensus Expectations

  The report compares actual second-quarter results and third-quarter guidance with market consensus expectations, using the magnitude of outperformance to assess the earnings event's impact on earnings expectations and the valuation discussion.

• Company Fundamentals and Financial Frameworks

  Morgan Stanley ModelWare Framework

  Unless otherwise stated, the report's metrics and forecasts are based on Morgan Stanley ModelWare and distinguish among actual company data, Morgan Stanley Research forecasts, and Refinitiv consensus expectations.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Salesforce, Inc. (CRM.N, CRM UN)

  Agentforce, Data Cloud, and Headless partnerships create new AI monetization opportunities, but headwinds from the legacy product portfolio mean that an acceleration in organic growth still requires validation.

  Strengths

  Enterprise distribution, systems of record, and governed data and workflows form a durable moat; Agentforce adoption is accelerating, customer attrition is near historical lows, contract durations are lengthening, and large-scale share repurchases provide support.

  Weaknesses

  Second-quarter organic subscription revenue growth slowed, the recoveries in Marketing and Commerce remain unstable, and MuleSoft and Tableau continue to face pressure from license revenue and bookings.

  Comparison

  The $235 price target implies approximately 29 times GAAP EPS, which the report considers broadly in line with large-cap software peers with similar growth profiles.

  Risks

  AI-native competition, displacement by internally built CRM solutions, continued weakness in legacy businesses, and pressure on margins from AI investment could all impede stable growth.

Key data

• Second-Quarter Constant-Currency cRPO Growth14%Approximately 1 percentage point above guidance, an improvement from merely meeting guidance in each of the prior two quarters
• Third-Quarter Constant-Currency cRPO GuidanceApproximately 14%Above the market expectation of approximately 13% and excluding Contentful and Fin
• FY27 Revenue Guidance AdjustmentMidpoint raised by $200M, approximately 40 basis points$100M contributed by organic improvement, $200M by Contentful and Fin, and a $100M foreign-exchange headwind
• Second-Quarter Revenue OutperformanceApproximately $20MThe report therefore believes the increase in FY27 organic guidance is not simply a carry-forward of the quarter's outperformance
• Second-Quarter Subscription Revenue Growth11% constant-currency growth, approximately 6% organic growthOrganic growth slowed from approximately 7% in the first quarter
• Second-Quarter Non-GAAP Operating Margin34.1%Approximately 30 basis points above consensus expectations; FY27 guidance maintained at 34.3%
• Agentforce ARRMore than $1.5BUp more than 240% year over year, compared with 205% growth in the first quarter
• Agentic Work Units3.2BUp 97% sequentially
• Premium Agentforce SKU BookingsMore than doubled sequentiallyStronger AI commercialization signal
• New Paying Agentforce Customers in Production2,000Up 70% sequentially
• Share of Agentforce Bookings from Additional Capacity50%From existing customers purchasing additional capacity
• Adoption Among Leading AI Companies9 of the top 10 AI companies use Salesforce and SlackRelated spending grew 435% year over year
• Net New AOVGrowth reached a four-year highFirst-half net new AOV growth significantly exceeded overall AOV growth
• Accelerated Share Repurchase$25BInitial delivery of 103M shares, with final settlement expected in October and at least 14% of shares outstanding expected to be repurchased
• Price Target AdjustmentRaised from $185 to $235Based on multiple expansion among comparable companies, with the Equal-weight rating maintained
• Base Case$235Approximately 10% revenue CAGR from FY26 to FY29, approximately 36% FY29 operating margin, and an approximately 12 times multiple
• Bull Case$350Approximately 15% revenue CAGR from FY26 to FY29, approximately 39% FY29 operating margin, and approximately 20% free cash flow CAGR
• Bear Case$90Revenue growth falls to the mid-single digits over the next three years, FY29 margin is approximately in the mid-30% range, and a 6 times FY29 EV/FCF multiple is applied

Impact & implications

The report believes the second-quarter data weakened the bearish narratives that “SaaS is dead” and that AI will rapidly replace Salesforce. Improving cRPO, retention, and Agentforce commercialization metrics could provide some support for the stock. However, further valuation upside still depends on actual acceleration in second-half organic revenue and whether the AI and Headless businesses can sustainably offset headwinds from legacy products. Margin outperformance alone is not yet sufficient to resolve the issue of limited growth visibility.

Risks

• If Agentforce or the Headless business cannot stabilize overall growth, improving AI adoption may be insufficient to offset headwinds from the legacy product portfolio.
• AI-native competitors could prompt customers to adopt internally built solutions, increase customer attrition, and reduce revenue growth to the mid-single digits over the next three years.
• Enterprise adoption of other platforms could reduce demand for next-generation CRM front-office solutions.
• Generative AI investment could continue to pressure margins, while incremental spending could also limit the realization of operating leverage.
• Improvement in Marketing may not be sustainable, Commerce adoption cycles may be longer than expected, and weakness in MuleSoft and Tableau bookings and renewals may persist.
• If generative AI products and Headless projects monetize faster than expected, the company implements larger-scale cost reductions, or accelerates and expands share repurchases, there is upside risk to the price target and rating.

What to watch

• Monitor whether improving constant-currency cRPO in the second half translates into sustained acceleration in organic subscription revenue.
• Track whether Agentforce ARR, usage, premium SKU bookings, and production customer counts continue to accelerate.
• Watch whether the Marketing recovery is sustainable and whether Commerce follows with improvement “several quarters” later.
• Monitor whether volatility in license revenue, bookings, and renewals for MuleSoft, Tableau, and Integration & Analytics eases.
• Watch whether improvement in core Salesforce growth becomes clearer after Informatica's inorganic contribution enters the year-over-year comparison base in the fourth quarter.
• Track whether Headless partnerships can broaden distribution and generate sustainable monetization, as well as the final settlement of the $25B accelerated share repurchase program in October.