Salesforce logs record earnings and raises guidance, so why is stock dropping?

Salesforce (NASDAQ:CRM) stock was down about 5% on Thursday, following its Wednesday afternoon first quarter earnings release. The selloff may have appeared to be a headscratcher at first glance, as the company posted solid first quarter results and raised its outlook for the full fiscal year.

But investors may have reacted negatively to the company’s $8 billion acquisition of Informatica – an AI-powered cloud data management company.

The customer relationship management technology provider posted record first quarter results, generating revenue of $9.8 billion, up 8% year over year. That topped analysts’ estimates of $9.7 billion.

Subscription & support revenue accounted for $9.3 billion of the total revenue, up 8% over the same quarter a year ago. And its backlog, or current remaining performance obligation, jumped 12% year-over-year to $29.6 billion.

Net income ticked up slightly to $1.54 billion, from $1.53 billion in the same quarter a year ago. Earnings were $1.59 per share, up about 2% year-over-year. Adjusted net income was $2.5 billion, up 4%, while adjusted earnings rose 6% to $2.58 per share. That bested estimates of $2.54 per share.

AI drives revenue

Salesforce’s performance was driven by $1 billion in data cloud and AI annual recurring revenue, which is up more than 120% year-over-year. Roughly 60% of the top 100 deals in Q1 included data cloud and AI.

Salesforce has closed more than 8,000 deals for its agentic AI CRM platform, Agentforce, since it launched last fall. Agentforce has already handled more than 750,000 requests, reducing the case volume by 7%.

“We’ve built a deeply unified enterprise AI platform—with agents, data, apps, and a metadata platform—that is unmatched in the industry,” Marc Benioff, chair and CEO, Salesforce, said. “With Agentforce, Data Cloud, our Customer 360 apps, Tableau, and Slack all built on one trusted, unified foundation, companies of every size can build a digital labor force—boosting productivity, reducing costs, and accelerating growth.”

Salesforce raises its guidance

In addition to the strong Q1 earnings, Salesforce boosted its guidance for the full fiscal year.

It raised its revenue guidance by $400 million to a range of $41.0 billion to $41.3 billion, which would represent growth of 8% to 9%. It also bumped up its guidance for subscriptions revenue growth to 9.5%, from the previous guidance of 8.5%.

Further, it maintained its operating margin outlook at 21.6% but raised its earnings projections to a range of $7.15 to $7.21 per share. That’s up from the previous outlook that called for earnings of $6.95 to $7.03 per share.

The earnings and outlook are typically a recipe for the stock price rising post-earnings, particularly on a plus day for the markets. But that was not the case, as investors responded negatively, it seems, to the Informatica acquisition.

Benioff called it a transformational acquisition for Salesforce, saying Informatica’s data foundation and Master Data Management (MDM) services will enhance its agentic AI platform, Agentforce.

“Together, we’ll supercharge Agentforce, Data Cloud, Tableau, MuleSoft, and Customer 360, enabling autonomous agents to act with intelligence, context, and confidence across every enterprise,” Benioff said. “This is a transformational step in delivering enterprise-grade AI that is safe, responsible, and deeply integrated with the world’s data.”

Salesforce expects earnings accretion in year two after the transaction closes.

Deal raises some concerns

Some investors are skeptical of the deal, including analysts at RBC Capital, which slashed the price target from $420 per share to $275 per share.

“Stepping back, while we like the margin expansion story at Salesforce and the valuation is undemanding, deal risk with Informatica has tipped the scales for us,” RBC analyst Rishi Jaluria said, reported CNBC.

Analysts that took a negative view of the deal questioned the need for the acquisition and expressed concerns about growth through acquisition, rather than focusing on organic growth.

Overall, analysts rate Salesforce as a buy with a median price target of $370 per share, which would represent nearly 40% growth. The stock is down about 20% YTD to $265 per share. It has a P/E ratio of 43 and reasonable forward P/E of 24.