Why Salesforce was falling today, even as the Nasdaq rallied

Shares of software giant Salesforce (NYSE: CRM) were falling on Tuesday, down as much as 3.9% in early trading, before recovering slightly to a 2.7% decline as of 1:30 p.m. EDT.

The move was somewhat notable, given that the broader Nasdaq Composite was up by about 1.4% at the same time.

Salesforce was on the receiving end of a Wall Street analyst's downgrade today, along with a big price target cut. That led to a sell-off; however, given the stock's bargain-basement valuation, is the analyst's negativity already baked into the share price?

Morgan Stanley sours on Salesforce's AI transition

Salesforce is facing the same headwinds and uncertainties that all software stocks have experienced since the emergence of powerful AI coding agents from Anthropic and other AI labs at the beginning of this year.

Salesforce, of course, isn't standing still. The company has developed its own agentic AI features and capabilities, which it calls Agentforce. In June, Salesforce made a very interesting acquisition with an eye toward the agentic future: customer service agent software company Fin. Fin has already transformed its business model in the manner Salesforce needs to, including an outcome-based pricing model on its fully autonomous customer service agent, run on a custom AI model independent of the major AI labs.

Still, Adam Wood of Morgan Stanley doesn't think it's enough. The analyst lowered his rating on the shares from "Overweight" to "Equal Weight" and his price target from $287 to $185 today.

Wood is actually bullish on the leading indicators for Agentforce and Salesforce's new agentic AI offerings; however, Wood also acknowledges that this is coming at the expense of some of Salesforce's larger, legacy software subscription services. Moreover, Agentforce's revenue is still small, coming in at just a $3.4 billion annualized run rate last quarter; meanwhile, Salesforce projects about $46 billion in revenue this fiscal year. So Agentforce still accounts for only about 7% of revenue; even if that keeps growing fast, a drag on the larger non-agentic business could cap overall growth.

While he believes Salesforce is making the right moves and could emerge as an AI winner, Wood now thinks the inflection to overall company-level organic growth may take longer than expected. Given the uncertainty, he is bringing down the stock price to reflect a compressed valuation multiple that the market now attributes to much of the software sector.

Long-term opportunity in the software sector?

It should be noted that Salesforce currently trades at roughly $168 per share, which is still below Wood's new price target and represents a valuation of just 12 times this year's earnings estimates.

That valuation implies little to no growth going forward, which may be warranted given the uncertainties around agentic AI. However, Salesforce is returning lots of cash to shareholders through a large share repurchase program. If the company successfully navigates the agentic AI transition and eventually returns to growth, today's valuation could be a bargain. Still, investors should be prepared to wait a while to find out.

Billy Duberstein and/or his clients have positions in Salesforce. The Motley Fool has positions in and recommends Salesforce. The Motley Fool has a disclosure policy.