Has Salesforce Lost Its Moat?

Salesforce stock dropped 6% yesterday to $196, hitting a 52-week low. The stock’s down 42% over the past twelve months. Salesforce is caught in the AI disruption narrative—fears that AI agents will replace traditional CRM software. The company just landed a $5.6 billion Army contract, yet the stock can’t catch a bid.

Now that CRM stock is sitting at 52-week lows, the natural question is – should you buy this dip? But before we answer this, if you seek an upside with less volatility than holding an individual stock like CRM, consider the High Quality Portfolio. It has comfortably outperformed its benchmark—a combination of the S&P 500, Russell, and S&P MidCap indexes—and has achieved returns exceeding 105% since its inception. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

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Salesforce’s fundamentals are solid

Salesforce’s revenue hit $40.3 billion in the trailing twelve months with 18% net margins. Q3 showed good performance with 9% revenue growth and expanding margins. The company is pivoting to AI with Agentforce—their autonomous agent platform—and reached $1.4 billion in annual recurring revenue. Cash generation remains strong with improving free cash flow.

So, is it a buy after the selloff?

The valuation makes a case. Salesforce trades at a P/E of 18x based on TTM adjusted earnings of $11.15 per share. That’s 55% below its 5-year average of 40x. The forward P/E of 15x is particularly interesting, suggesting earnings growth will compress the multiple further. For a company with $40 billion in revenue, double-digit growth, 80% adjusted gross margins, and a dominant market position, paying 18x trailing earnings or 15x forward earnings looks reasonable, especially given the company’s margin expansion story.

But then why is the market panicking?

The market’s current skepticism toward Salesforce (CRM) centers on four structural threats that jeopardize its long-term growth narrative.

1. The “Seat Compression” Paradox: Salesforce’s business model relies on per-user (seat-based) pricing. As Agentforce and other AI agents automate roles in sales and support, customers may drastically reduce their human headcount. Investors fear that the revenue generated from AI “agents” will fail to offset the loss of high-margin human licenses, leading to a permanent contraction of the core revenue engine.
2. Disruption of the Software Moat: There is a growing concern that the value in the AI stack is shifting toward foundational models (OpenAI, Anthropic) and hardware (NVIDIA). If enterprises can build custom agents directly atop their own data using cheap APIs, Salesforce’s role as an “application wrapper” is diminished. This perceived commoditization suggests that Salesforce’s traditional competitive moat is shrinking.
3. Skepticism of AI Growth Quality: While Salesforce reported $1.4 billion in AI ARR, the market remains wary. Analysts suspect this reflects a “cannibalization” of existing budgets—shifting spend between products—rather than true incremental growth. Until the company demonstrates a clear revenue re-acceleration from its current 9% toward 15%+, investors are unwilling to award the stock a premium growth multiple.
4. Technical and Systematic Capitulation: The breach of key psychological levels, such as the $200 mark, has triggered a technical downward spiral. This “capitulation” is often driven by systematic fund selling and institutional tax-loss harvesting. These external market forces can overshadow fundamental wins, such as the company’s recent $5.6 billion Army contract, creating a “falling knife” scenario in the short term.

The bottom line

Salesforce remains in a technical downward spiral, and while its valuation appears attractive relative to historical levels, market concerns regarding its structural future are genuine. Investors are no longer satisfied with the promise of AI integration; they are demanding concrete proof of sustained, incremental growth. There’s panic around a perceived “Extinction Event” for the traditional SaaS business model.

Until Salesforce demonstrates that its AI strategy can offset the erosion of its traditional seat-based revenue, the stock is best avoided. For those looking to capitalize on the AI boom with less volatility, defensive infrastructure plays like Corning and Caterpillar represent safer, more tangible bets on the sector’s long-term expansion.

Still, investing in a single stock without comprehensive analysis can be risky. Consider the Trefis Reinforced Value (RV) Portfolio, which has outperformed its all-cap stocks benchmark (combination of the S&P 500, S&P mid-cap, and Russell 2000 benchmark indices) to produce strong returns for investors. Why is that? The quarterly rebalanced mix of large-, mid-, and small-cap RV Portfolio stocks provided a responsive way to make the most of upbeat market conditions while limiting losses when markets head south, as detailed in RV Portfolio performance metrics.

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