A Strong Business at a Discounted Price

Salesforce has long been a major player in business software solutions but the market isn’t treating it like one. Despite strong margins, rising cash flow, and a more developed approach to AI-powered tools, the company is valued lower than several similar companies. This has raised doubts about whether Salesforce has already peaked or whether investors are simply overlooking the company’s ongoing progress.

The truth lies somewhere in the second camp. Salesforce is quietly handling its strategy effectively: streamlining how it manages expenses, expanding its recurring revenue base, and investing heavily in AI systems. The numbers suggest a business in transition not decline and that disconnect may be offering patient investors a compelling setup.

Salesforce’s Q1 FY2026 results reflected steady performance and a clear plan. Revenue grew 8% year-over-year to $9.8 billion, with subscription and support revenue its most stable segment rising 8% as well. While the topline growth is modest, it’s being delivered alongside healthy margins: GAAP operating margin came in at 19.8%, with a robust non-GAAP margin of 32.3%.

Strong cash flow continues to be a highlight. Operating cash flow reached $6.5 billion for the quarter, a 4% increase YoY, and free cash flow followed closely at $6.3 billion. This allowed Salesforce to return $3.1 billion to shareholders through buybacks and dividends showing greater focus on managing capital responsibly.

Importantly, Data Cloud and AI-related annual recurring revenue has now crossed $1 billion, growing over 120% YoY. Salesforce has closed more than 8,000 deals tied to Agentforce, its AI agent platform half of which are already paid. While still early, the scale suggests real room to generate revenue down the line.

Guidance remains steady, with full-year revenue expected between $41.0 billion and $41.3 billion representing 89% growth and free cash flow expected to grow 910% for FY2026. The company reaffirmed a 34.0% non-GAAP operating margin target, showing that it can grow while staying efficient even while investing heavily in innovation.

Salesforce’s most of its shares are held by patient, big-name investors a sign of confidence in the company’s fundamental durability. Vanguard and BlackRock together hold over 15% of the company’s shares, and other large asset managers round out a list that reads like some of the most recognized institutional names. These investors aren’t chasing headlines they’re betting on enterprise resilience and multi-year value creation.

Additionally, insider ownership has remained stable. While modest in percentage terms, CEO Marc Benioff continues to hold a significant stake, aligning executive interests with shareholders. The absence of activist pressure or high-frequency turnover in ownership further supports the notion that Salesforce is viewed as a strategic long-term hold not a tactical trade.

Despite its scale and profitability, Salesforce trades at noticeably lower valuation multiples than its peers:

Salesforce is generating cash flow and earnings while trading at valuations more commonly assigned to slower-growth, low-margin businesses. Its EV/EBITDA ratio of ~19.7x is nearly half that of Adobe and Intuit despite similar or superior margin performance and greater product breadth.

This pricing difference is tough to explain given Salesforce’s scale, profitability, and growing AI monetization. If anything, Salesforce’s mature margins should support a higher multiple particularly when peers like HubSpot are still losing money yet trade at much richer revenue multiples. The market seems to be penalizing Salesforce not for poor performance, but for its less straightforward story for investors.

Salesforce dominates CRM, but its competitors are no longer playing catch-up they’re reshaping expectations. And while none are direct replacements, each introduces specific pressures that could weigh on Salesforce’s ability to justify a higher multiple.

HubSpot is growing revenue at over 20% year-over-year, with net revenue retention above 110% and increasing adoption in the mid-market enterprise. Its product-led model allows for efficient customer acquisition and expansion, which contrasts sharply with Salesforce’s high-touch sales engine. As HubSpot pushes upmarket with easier integrations and better UI, it could erode Salesforce’s growth narrative in smaller teams and fast-scaling startups segments that feed into long-term enterprise deals.

Intuit has kept operating margins near 30% while expanding its product stack across personal finance, small business accounting, and marketing. That breadth is starting to touch areas where Salesforce has historically held influence especially in SMBs and financial services. Intuit’s growth is not about being everything to everyone; it’s about deepening wallet share in focused verticals.

Adobe, through its Experience Cloud, is gaining ground among CMOs looking for end-to-end campaign management. In Q1 alone, Adobe’s Digital Experience segment grew mid-teens, and its integration with Creative Cloud makes it hard to dislodge. For Salesforce, this means increased pricing pressure and more friction in marketing tech deals particularly among customers who don’t want to manage fragmented ecosystems.

If Salesforce can’t clearly demonstrate that its cross-cloud architecture drives superior outcomes, it may struggle to escape the complex incumbent label. That perception not only shapes customer decisions but also market pricing.

While Salesforce looks cheaper compared to similar companies, that lower valuation shows that investors have real doubts about Salesforce’s ability to deliver not just sentiment. The company’s effort to expand into AI through products like Agentforce and Data Cloud, is promising but just getting started. Despite the volume of AI-related deals closed, only half are paid, and the overall impact hasn’t had a major effect on revenue yet. Management has signaled that meaningful contribution from these initiatives may not materialize until FY2027.

Moreover, the company’s traditional growth engines the Sales and Service Clouds are showing signs of fatigue, both posting mid-to-high single-digit growth rates. Even with a solid ability to manage costs and maintain profit levels, a decelerating core makes it harder to justify a higher stock valuation.

Competitors are embedding AI more deeply and quickly into their platforms. Rivals like Microsoft and Oracle offer bundled AI functionality at scale, while Salesforce is still in the early stages of turning its tools into meaningful revenue. Additionally, Slack’s AI integration restrictions may alienate users, hindering adoption of Agentforce.

Macroeconomic factors, cautious IT spending, high interest rates, and regulatory scrutiny over data also present headwinds, especially for large platform vendors. Lastly, the pending acquisition of Informatica adds the chance that combining operations might not go smoothly that could distract from core execution at a critical moment.

Each of these risks strikes at the core of the thesis: Salesforce must prove that it can grow into more profitable AI-focused areas without letting costs get out of hand. That balance will ultimately determine whether the current valuation is a floor or a ceiling.

Salesforce is not broken but it is mispriced. The company is executing at scale, sustaining high margins, and returning billions to shareholders, yet the market continues to discount its value. Why? Because the story has become harder to follow. While competitors like Intuit and Adobe are rewarded for clear, focused narratives, Salesforce is caught between reinvention and execution, with AI promises still waiting for proof.

That’s precisely where the opportunity lies. Salesforce today trades at a multiple more typical of mature software but it’s investing like a growth company. If even a portion of its AI strategy pays off, or if the Informatica acquisition accelerates data unification across its clouds, the market will have to reassess the company’s trajectory and, with it, its valuation. On the other hand, even if AI monetization is slower than hoped, Salesforce still throws off cash and maintains best-in-class operating leverage.

In short, this is a stock trading like a middle-of-the-road stock but with room to surprise. Investors willing to look past the complexity and trust in the fundamentals may find themselves holding a business that’s not just undervalued but tactically overlooked by many investors.

This article first appeared on GuruFocus.