Morgan Stanley maintains $404 target on Salesforce stock

Morgan Stanley reiterated its Overweight rating on Salesforce with a $404 price target following Q1 FY26 results, despite a negative market reaction to unchanged margin guidance despite a favorable currency impact. While revenue and cRPO slightly exceeded estimates, concerns persist regarding core performance, margins, and the Agentforce feature, with some analysts pointing to potential deceleration in enterprise growth; however, the company's focus on AI and data, along with a planned expansion of its salesforce, remains a point of interest, and the firm projects sustainable low teens Free Cash Flow growth.

Analysis

Salesforce's Q1 FY26 performance aligned with Morgan Stanley's expectations, yet the market reacted negatively, primarily due to concerns regarding core performance, margins, and the new Agentforce feature. The reported Q1 operating margin of 32.3% was slightly below the market's 32.6% expectation, and the company reiterated its FY26 margin guidance at 34% despite a $400 million revenue guidance increase from favorable currency movements, attributing this to higher international expenses offsetting revenue gains. InvestingPro data indicates robust fundamentals, with gross profit margins at 77.34% and a 'GOOD' financial health score, though Q1 is seasonally the weakest for margins. Morgan Stanley acknowledges that expectations for margin expansion may now be more conservative, even as Salesforce invests in growth areas like Agentforce and Data Cloud, but projects sustainable low teens Free Cash Flow (FCF) growth, noting the current share price of $266.92 against a target range of $225 to $442 from 33 analysts. The firm also highlights that Salesforce shares trade at a mid-teens EV/FCF/G multiple, suggesting potential for expansion towards the Large-Cap average of approximately 1.8X. While firms like TD Cowen (Buy, $375 target) and FBN Securities (Outperform, $360 target) remain bullish on revenue (up 8% YoY) and cRPO (up 12%) beats, Citi revised its target down to $295 (Neutral), citing growth deceleration concerns. Salesforce's strategic focus on data, AI, and a planned 22% YoY salesforce expansion remain key, though the latter is viewed by some as aggressive selling rather than purely organic demand.

Key Decisions for Investors

• Investors should monitor Salesforce's ability to translate investments in Agentforce, Data Cloud, and its expanded salesforce into accelerated revenue growth and discernible margin improvement in subsequent quarters, particularly given the market's sensitivity to the unchanged FY26 margin guidance.
• Consider the valuation argument presented by Morgan Stanley, where Salesforce's current EV/FCF/G multiple suggests potential upside if low-teens FCF growth is sustained, while also weighing concerns from analysts like Citi regarding potential growth deceleration and enterprise sector challenges.
• Closely track upcoming earnings reports for evidence of margin trajectory improvement beyond the seasonally weak Q1, and scrutinize management's commentary on the impact of international expenses and the effectiveness of resource reallocation towards new product cycles and growth initiatives.