From: allin
Salesforce recently experienced a significant market downturn, reflecting broader concerns about the technology sector and the economy [01:04:16].
Salesforce Q1 Performance and Outlook
On a Thursday, Salesforce’s stock dropped over 20%, marking its worst day in nearly 20 years and resulting in a loss of approximately $40 billion in market cap [01:04:31].
For the first quarter, Salesforce reported 40 million short of Wall Street expectations [01:04:39]. Despite the revenue miss, net income surged to 6 billion [01:04:58]. This profitability was attributed to cost-cutting measures implemented after activist investors intervened to restructure the business [01:05:05].
However, Salesforce’s guidance for Q2 projected only 7% growth, considered low for the company [01:10:13]. The stock’s valuation is now roughly 20 times its operating cash flow forecast with sub-10% revenue growth, aligning it with the yields of 30-year treasuries [01:06:36].
Broader Tech Market Concerns
Following Salesforce’s earnings report, other SaaS companies and Dell also saw their stocks decline significantly, with Dell dropping 20% in after-hours trading [01:42:00]. This suggests a potential “slow reckoning” in technology [01:38:00].
Analysts point to two main factors for the slowdown in enterprise software spending:
- Macroeconomic Slowdown: The latest US GDP growth forecast was revised down to 1.4% [01:15:04], with annualized CPI inflation at 3.6% and 30-year treasury yields at 4.7% [01:17:01]. This economic environment is described as stagflation, where the economy is not growing, prices are rising, and borrowing costs are high [01:17:05]. This leads to reduced spending by enterprises and multiple compression for tech stocks [01:42:41].
- AI’s Impact on the Software Business Model:
- Commoditization: There’s a shift underway where the premium pricing of SaaS companies is being challenged. Generative AI could enable companies to build tools internally or allow competitors to emerge with significantly underpriced alternatives [01:07:25].
- Value Proposition: Enterprises are questioning the value of paying for generative AI services offered by major software vendors, especially with readily available open-source tools [01:07:58]. The market is voting with its dollars, indicating that large, monolithic software companies may struggle to find new customers who can now obtain similar functionality at a fraction of the cost, or even for free [01:10:16].
- Cost Structure: The current cost structures of large software organizations may become unsustainable, potentially leading to significant layoffs over the next 5 to 10 years [01:10:30].
- Pricing Model: The “per seat” pricing model for SaaS is being reconsidered, with suggestions for a shift towards a consumption-based model [01:14:15].
The “AI Mini Bubble”
There’s a growing sentiment that a “first AI mini bubble” might be bursting [01:41:57]. Companies are spending vast sums on AI — estimated at $750 billion a year for chips, energy, and other infrastructure [01:39:22] — without yet seeing proportional incremental revenue or significant productivity gains in large enterprises [01:41:44]. While startups can rapidly adopt AI-first approaches and achieve efficiencies, large organizations face challenges in integrating new methods into existing workforces [01:40:51].
Despite these challenges, some express confidence in established leaders like Mark Benioff of Salesforce, noting that founder-led public companies tend to outperform indices and are adept at adapting to new trends [01:18:17].