Salesforce FQ2 27 – SaaSpocalypse Never!

Another nail in the coffin of the SaaSpocalypse theory.

• A standard beat and raise became a blowout as Salesforce saw an acceleration in orders and announced a partnership with Anthropic that put the shares up 22.5% in yet another signal of what needs to be done to explode the SaaSpocalypse narrative.
• FQ 27 revenues / Adj-EPS were $11.3bn / $5.90, in line with the revenue estimate but way above the EPS estimate of $3.27.
• This was mostly due to gains on strategic investments, which delivered an extra $2.53 in EPS.
• Reversing this out (as one should) gives $3.47 as the real underlying performance of the company in FQ2 27 and what one would expect given the revenue performance.
• FY 2027 guidance was also lifted slightly, with 11% YoY growth in FY 2027 revenues increased to 11% – 12% with constant operating margins of 34.3%.
• Hence, on the numbers, this was a pretty regular beat and slight raise that the likes of ServiceNow, Adobe and SAP have also been regularly producing.
• However, what changed was a partnership with Anthropic where Dario made a personal appearance and an acceleration in orders, which confounds the SaaSpocalypse narrative that has hammered the software and service sector over the last 15 months.
• AI-related revenues such as Agentforce accelerated to 200% YoY and Agentic Work Units (AWUs) delivered also grew by 111% YoY.
• At these growth rates, these revenues will quickly begin to have an impact on the overall sales growth of the company, acting as a proof point that there is no SaaSpocalyspe at Salesforce.
• The result was an admission by the market that perhaps Salesforce is one of the babies that has been thrown out with the bathwater, and a rally that brings it 66% off from its June 26 low, reducing the decline from its all-time high to 28%.
• This is another clear demonstration (like Snowflake last quarter) that to break the narrative, one needs to demonstrate an acceleration of growth coming from AI-related business.
• This is occurring in the software and services sector specifically within the high-quality enterprise names that have embraced AI rather than tried to fight it.
• With two companies now demonstrating that they are thriving rather than dying, we are beginning to see separation across the sector.
• For example, ServiceNow, Figma, CrowdStrike, and Palo Alto Networks all rallied 10% or more following Salesforce’s results while Workday, Infosys, Intuit and Accenture barely moved.
• Adobe rallied 5.7% and remains the odd one out, as there are currently more uncertainties around the company, as it remains without a CEO or a CFO.
• It also has a consumer business which I expect will eventually get wiped out by AI, but as it is such a small part of the business and the shares have fallen so much, this is an irrelevance in my opinion.
• I have argued since February (see here and here) that some of the sector will thrive as a result of the AI tsunami rather than be wiped out by it, which is what is beginning to happen.
• Salesforce still has another 44% to go before it passes its 2025 peak, and my positions in the sector have even further to go as they have yet to fully put the SaaSpocalypse narrative to bed.
• On its current trajectory, I value ServiceNow at $243 per share, 76% above its close yesterday and Adobe at $440, 52% above.
• Hence, there is still a long way to go, but things are beginning to move in the right direction.
• I am looking for ServiceNow to increase its forecasts or order book as a result of AI-related sales in order to continue and complete the recovery, while Adobe needs to make good appointments for its CEO and CFO to underpin and extend its recent run.
• To fully recover and exceed its previous highs, Adobe will also need to show some form of revenue acceleration, but for now, I think that management stability will be enough for another leg of the recovery.
• This position has delivered 26% of the return that I am looking for, and so there remains a long way to go.
• I remain a happy holder of Adobe and ServiceNow.