AI Disruption Forces Downgrade of Salesforce Amid Market Shift

NEW YORK, NY — Analysts at Melius Research have downgraded Salesforce to a hold-equivalent rating, citing the escalating impact of artificial intelligence (AI) on the software market. The report, released Monday, underscores significant shifts in investor sentiment as AI begins to reshape the landscape of enterprise software.

Melius described AI’s influence on software as comparable to the impact of cloud computing on traditional data centers. Historically, businesses focused on maintaining in-house data centers, but this trend has shifted toward cloud services, with providers like Amazon Web Services (AWS) and Microsoft Azure leading the way since the mid-2000s. According to Melius, companies like Dell and IBM faced valuation declines as investors anticipated slower growth.

“Just when you thought the coast was clear, their PE multiples kept going lower and lower — from the 20s to mid-single digits,” Melius noted in its report, emphasizing the urgency for companies to adapt to the changing market.

Microsoft serves as a prime example of how a company can evolve in response to market disruptions. After CEO Satya Nadella prioritized cloud services upon taking charge in 2014, Microsoft saw substantial growth in its Azure offerings, effectively distancing itself from the traditional hardware model.

“If your business model is being disrupted, you can still adapt, survive, and thrive,” Melius stressed. The analysts warned that companies failing to adjust could see their valuations plummet as investors shift focus to AI-driven solutions.

Salesforce, a prominent player in Software-as-a-Service (SaaS), faces challenges as businesses leverage AI tools to reduce workforce costs. Analysts believe this trend poses a threat to traditional SaaS revenue models, as fewer employees may lead to reduced demand for software licenses.

“We think companies are increasingly understanding that AI tools can help cut expensive knowledge workers with those costly SaaS seats,” Melius stated, highlighting concerns for Salesforce amid the rising adoption of AI technologies.

Despite the downgrade, Melius acknowledged that other tech companies, like Microsoft and Amazon, stand to benefit from increased demand for cloud services that enable AI utilization. The emergence of ‘agentic AI,’ systems that can perform tasks autonomously, further fuels this demand in the tech sector.

While Salesforce is being scrutinized for its SaaS model, the company is actively developing its AI offerings, dubbed Agentforce, to help clients transition into the AI era. This strategic focus on innovation may counterbalance the market’s current skepticism toward SaaS.

As the analysts at Melius evaluated Salesforce’s position, they concluded that while the company has shown resilience, it remains mindful of the evolving market dynamics. The uncertainty surrounding SaaS highlights the need for Salesforce to demonstrate its adaptability in the face of AI disruption.

Currently, Salesforce’s rating reflects a cautious outlook, encouraging investors to remain vigilant and monitor the company’s ability to navigate these changes. Melius ultimately believes in the potential of AI but recognizes its profound implications for traditional software models.