CRM: Getting the Beni(off) of the Doubt
EPS Tuesday: How to Play This
Do you remember the 1Q CRM report from May 29th when the stock dropped 20% the next day? The company missed subscription revenues modestly and cRPO (current remaining performance obligations) was up 9.5% versus the company had guided 11%. The excuses ranged from facts like a “measured buying environment” to services headwinds and difficult comparisons. It was also refreshing (NOT) to see Marc Benioff acknowledge the weakness by saying:
Incredible results! Marc Benioff would describe the waters as “refreshing” as the Titanic sunk if CRM powered the boat. Having said that, the company rebounded somewhat in its 2Q report on 8/28 with cRPO and sales a smidge better and the stock trading basically flat post earnings. Thereafter, CRM hosted its annual Dreamforce event September 17-19 and promoted their new AgentForce, new AI tools to much excitement. The stock has rallied from $260 to $330 on the hype of the introduction and GA (general availability) at the end of October.
The product is very cool offering companies the ability to take their internal unstructured data such as Slack conversations, emails, voice calls and automating interactions, using generative AI, LLM learning, both internally and with customers. It is not unique, however, with Microsoft and even Workday having their own versions of “agents”, with availability of the latter sometime in 2025. The reality here is every software company will have agent products, AI, to offer to its existing customer bases. The key to monetization will be pricing, usefulness and ease of integration. CRM has taken a new tact with pricing at $2 per “conversation” or interaction. If an employee seeks to peruse the product to create a response to a customer, it will cost $2 for the query with the LLM learning from the results and becoming smarter for the next query. If successful, the pricing model is quite smart as the upfront costs are extremely low and the customer trialing should be near universal across most of its installed base. Will it drive a much-needed revenue re-acceleration at CRM? Benioff will tell you emphatically YES, even if it doesn’t.
All that said, the quarter at hand, 3Q of 2025, will be reported on Tuesday evening and has some nuances and trading potential we wanted to share this week based on our preparation.