Why Salesforce is staying in the portfolio despite a harsh analyst downgrade
C
CNBC Finance
5 min read
Salesforce got hit with yet another analyst downgrade. But Jim Cramer is not ready to cut ties with the enterprise software giant and smallest position in the Club portfolio. Shares of Salesforce slipped over 2% Thursday, trading around $162.50 apiece, after KeyBanc downgraded the stock to a hold-equivalent rating and removed its $290 price target. The stock was down a lot more in premarket trading when Jim was talking about Key's call on CNBC. Jim read some of the quotes from the note, which were pretty damning. "The information we're gathering, both financial and anecdotal, is not rebounding or trending in the right direction," analyst Jackson Ader wrote. Not long after talking about it on television, Jim broke back in with reaction from Salesforce CEO Marc Benioff. Jim said Benioff pinged him and argued the KeyBanc note was a "bad call," arguing that it clashes with evidence that shows its Agentforce platform is doing much better than what the firm indicated. Benioff "deserves some benefit of the doubt," concluded Jim, while acknowledging he respects both the analyst and the CEO. The downgrade comes as Salesforce battles the "SaaSpocalypse" narrative that has clobbered its stock. Salesforce is down roughly 7% over the past month and 38% this year. After a brief surge in late May and early June back over $200 a share, the sellers returned in full force, pushing the stock down 14 straight days until it reached a multiyear closing low of $150.12 on June 22. Investors worry that artificial intelligence will impale Salesforce's seat-based business model and allow customers to more easily replace some of its offerings with bespoke applications built in-house. Those concerns are exemplified in a Bloomberg News report Thursday , which said Starbucks is using AI to develop internal tools that could replace software purchased from Microsoft and IBM. Starbucks and Microsoft are both Club names. Defenders of Salesforce and other software vendors argue those concerns are overblown, in part because customers' trusted data is deeply entrenched in legacy applications and it's complicated to rip out systems of record. To fend off the threat, Salesforce and its peers are also working to incorporate AI features and tools into their products. That reinforces the Club's own past reporting , which indicated Salesforce won't be discarded in the AI era, but customers needs and expectations are evolving. Salesforce has recently made a series of acquisitions to bolster Agentforce, its still-nascent AI platform. The product allows customers to build AI agents, which are capable of autonomously completing tasks, inside Salesforce's applications used by salespeople, marketing professionals and customer service reps. KeyBanc's Ader said he isn't impressed with the feedback he's gotten on Agentforce. In customer conversations, Ader wrote that he consistently hears the following: customer data isn't organized enough to meaningfully work with AI, and that Agentforce as a product "just isn't there." "We have little to no evidence that compels us to pitch CRM as a strong buying opportunity other than valuation, and when that's the case we think it's time to step back," wrote Ader. And while Salesforce has said the value of new customer contracts is growing, Ader wrote that he's having a hard time pinpointing the trend in the company's financials. In May, Salesforce said its Agentforce platform was picking up steam, with annual recurring revenue (ARR) now at $1.2 billion, up from $800 billion in the prior quarter. "A lot of the predictions that are happening in regards to the 'Saaspocalypse' just haven't happened," Benioff told Jim on "Mad Money" after the earnings report. Bottom line Salesforce remains a key battleground stock, and we're under no impressions that the debate will be settled anytime soon. The reporting around Starbucks' internal AI efforts underscore that reality. At the same time, Salesforce is our smallest position, with our 200 shares representing a less-than-1% weighting in the portfolio. This minimizes the impact that its performance can have on the portfolio, as we hold on and see whether Agentforce's revenue trajectory can continue and become a more meaningful contributor to the overall pie. Despite the downgrade, Jim said ,"There will come a time where people say, 'You know what? It's down so much. We should buy it.' When you talk to [KeyBanc's Jackson Ader], what Jackson will say is, 'Not yet.'" (Jim Cramer's Charitable Trust is long CRM. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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