Salesforce is set to release its earnings after the U.S. market closes on Wednesday, with investors viewing the report as a key indicator of whether the "SaaS doom" narrative has subsided. While the broader software sector has rebounded strongly by over 25% from its April lows, Salesforce has significantly lagged behind its peers due to concerns over AI competition. This earnings release may determine whether the former CRM giant can regain investor confidence.
The options market has already signaled its stance. According to SpotGamma data, on Tuesday, the trading volume of options contracts for Salesforce alone exceeded that of the entire IGV software ETF, with total premium volume approximately three times that of the ETF. About 61% of the premiums were concentrated in call options, with a call-to-put trading ratio of roughly 2.6 to 1. Implied volatility suggests the market anticipates a post-earnings stock price movement of around 7.8%, more than double the actual volatility observed after the past four earnings reports.
Year-to-date, Salesforce has fallen by 32%, down more than 50% from its all-time high. In contrast, the Nasdaq 100 Index has gained 19%, and the IGV software ETF has rebounded 26% from its April low. This significant divergence reflects deep-seated market concerns about Salesforce's ability to maintain its competitive moat in the AI era, elevating the significance of this earnings report beyond the company itself.
Software Stocks Rebound, Salesforce Lags Behind Since April, the software sector as a whole has staged a robust recovery. According to Bloomberg data, during this earnings season, approximately 87% of software companies reported both earnings and revenue that exceeded expectations, higher than the 71% revenue beat rate in the previous quarter and outperforming the overall S&P 500. Encouraging corporate earnings data suggest that AI's impact on the software industry may not be as severe as previously feared by investors and could even act as a tailwind in some cases. Coupled with valuations that had fallen to historical lows, Wall Street has begun to reassess whether the sell-off in software stocks since the start of the year was overdone.
However, Salesforce has barely participated in this rebound. Since hitting a three-year low on April 10, the stock has only recovered by 8.6%, far below the IGV ETF's 26% gain over the same period. The core market concern is that AI-native competitors like Anthropic and OpenAI are eroding demand and pricing power for Salesforce's customer relationship management (CRM) software, a business that has long been the core engine of the company's high growth and profitability.
Valuations Hit Bottom, Analyst Sentiment Remains Bullish Despite stock price pressure, Salesforce's fundamentals have not deteriorated in line with the prevailing pessimism. According to data compiled by Bloomberg, the company is projected to achieve 11% revenue growth in the fiscal year ending January 2027, up from 9.6% in fiscal 2026. Meanwhile, the stock's valuation has fallen to historically low levels—the current price-to-earnings ratio is only about 13 times expected earnings, significantly below the 10-year average of 45 times. It hit a record low two weeks ago and has remained below 30 times for over a year.
Among the 62 analysts covering Salesforce tracked by Bloomberg, 47 have issued buy ratings, with an average price target of $253. This implies an upside potential of approximately 41% from the current stock price, making it one of the highest implied return stocks in the S&P 500 technology sector. Brian Kersmanc, portfolio manager at GQG Partners, which holds Salesforce shares, stated, "Double-digit growth combined with a low-teens P/E ratio looks very attractive."
AI Threat: Discrepancy Between Sentiment and Reality There is a clear divergence in market views regarding the AI disruption narrative surrounding Salesforce. Last week, Bank of America gave Salesforce an underperform rating, citing "structural growth slowdown" and heightened AI competition risks. Analyst Tal Liani wrote in a research note, "Salesforce remains a deeply entrenched platform, but we expect AI transformation to bring about a structural reset, raising three core concerns: weak net new customer growth, limited upsell opportunities, and disappointing AI monetization paths. The company is transitioning from a historically high-growth platform to a mature cash generator."
Analysts with differing views argue that Salesforce's core value stems from its proprietary data assets and the deep integration of its products within customer enterprises, making it difficult to replace easily. Stephen Bersey, head of technology research at HSBC, noted that Oracle, Microsoft, and ServiceNow are similarly well-positioned, fundamentally different from software companies in segments like application development or image editing that are more vulnerable to AI disruption. "AI represents one of the most significant monetization opportunities for the software industry I've seen in decades," he said. "Ironically, as we stand at the doorstep of an AI-driven golden age for software, market pessimism towards this sector has reached historic highs."
Brian Kersmanc shares a similar view, believing that enterprises face high legal, compliance, and operational barriers when switching CRM providers. "I don't think Salesforce will be replaced by 'ambient programming.' As people become increasingly convinced it won't be disrupted, I believe the valuation will rise again."
Options Market Bets on Significant Volatility The activity in the options market underscores the high uncertainty and market attention surrounding this earnings report. According to CNBC, citing Cboe LiveVol data, implied volatility is pricing in a post-earnings movement of about 7.8%, more than double the actual volatility seen after the past four earnings reports. Among the largest trades, at least one trader spent $650,000 to purchase 2,000 call options expiring this Friday with a strike price of $195, betting on a roughly 10% stock price increase by the end of the week.
The options market for the IGV software ETF also shows a clear bullish bias. On Tuesday, the call-to-put trading ratio for the ETF exceeded 2 to 1, with call buying dominating. In contrast, the put trading volume for the semiconductor ETF SMH was five times that of call volume, highlighting a stark contrast in sentiment between the two sectors and reflecting relatively optimistic expectations for software stocks' prospects.
Whether software stocks can embark on a new bull market may hinge on the outcome of Salesforce's earnings report.
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