By Jacob Sonenshine
It's difficult to know when Salesforce's stock will recover, but it is extremely cheap, no matter how one looks at it.
Shares are down 45% since their record high in December 2024. It and the rest of the software group posted a stellar 2024, before the market became more discerning about which software companies were achieving faster sales and profit growth by cashing in on their artificial-intelligence services. That kind of acceleration is what tech companies need to maintain high valuations.
At this point, the selling in software has become extreme by historical standards, bringing Salesforce down. Almost no software name is immune, and Salesforce certainly hasn't been. AI-related revenue still represents a low-single-digit percentage of its total 2025 revenue of $41.2 billion, even though its AI business is growing rapidly, as Barron's highlighted in our recommendation to buy the shares late last year.
We've been wrong so far. We underestimated the degree to which sentiment for software would worsen as investors reckon with the idea that AI powerhouses Anthropic, OpenAI, and Alphabet could eventually use their AI programs to sell services to businesses. That would provide direct competition to the likes of Salesforce.
Forward price/earnings multiples for the industry, and Salesforce specifically, have dropped a ton, while the near-term earnings estimates for both have risen in the past few months.
That means Salesforce is now cheap. But before we dive into its valuation, let's be clear about the fact that the stock could trade terribly in the near term. It is cheap for a reason.
Until the market becomes convinced that the company's sales and marketing software, which helps corporate customers synthesize their data to identify growth opportunities, can hold its ground indefinitely against the big AI developers, the stock will have its rough stretches. It may rip higher after earnings and then sell off afterward as traders take their profits.
The stock rose almost 4% the day after earnings in early December, only to fall shortly thereafter. It is now well below its close from that trading day.
A saving grace for investors is that the stock trades at just under 15 times the earnings per share analysts expect for the coming 12 months, versus a range of about 19 to 31 times for all of 2025. Its current P/E multiple is rare for a growing technology company, especially seeing that the S&P 500 trades at just over 22 times. Salesforce historically has traded above the index.
Given Salesforce's lower valuation, it also trades at a cheap "PEG ratio, " which divides the P/E multiple by expected earnings growth. Salesforce's PEG is just under 1 right now, compared with 1.6 for the S&P 500.
The PEG ratio makes Salesforce stock look cheap relative to its growth potential, and the company could achieve that growth over the long term.
The reality is that while the market is afraid, nothing terrible has happened to earnings growth. This year, analysts expect 12% sales growth to $45.7 billion, compared with last year's 9%, driven by explosive growth in its AI offerings. Those include agents that help customers target opportunities more quickly, reducing costs.
That growth could easily outpace increases in operating costs such as research and development and employee pay, which would nudge profit margins higher. That would help profits grow.
This profit outlook may not do much for the stock this year because the concerns are about the long term, but it won't hurt. As long as Salesforce continues to post this growth -- and there is no certainty that the AI pioneers will alter their technology to compete with the specific service Salesforce provides -- it could eventually make today's valuation way too cheap.
The media personality and former trader Jim Cramer flagged the situation on CNBC television Wednesday morning. He noted that Salesforce's market capitalization is $182 billion, a fraction of Walmart's just over $1 trillion, even though the two companies have roughly the same annual free cash flow. Salesforce's cash flow is expected to increase faster.
The point is that while it is hard to know when the stock will turn itself around, it is super cheap. It isn't a crazy idea to stick with it.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
February 04, 2026 17:30 ET (22:30 GMT)
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