Why Salesforce stock will rebound in the future

It created an almost perfect storm of negative catalysts Sales force (NYSE:CRM) the company’s shares fell after the first quarter results were published on May 30. The stock is likely to remain weak for some time due to the Street’s current aversion to software names in general and Salesforce in particular.

Nevertheless, the company’s valuation is quite undemanding at this stage, its operating cash flow is growing rapidly, and artificial intelligence is expected to receive significant growth (artificial intelligence) boom in the long run. What’s more, the Street is likely to become much less hostile toward software companies in the medium term.

In light of these points, I believe CRM stock is a Hold for now.

Almost a perfect storm

With The Street already looking askance at software makers, Salesforce’s slightly lower-than-expected first-quarter results and second-quarter guidance sent its shares down massively. Notably, the company reported second-quarter revenue estimates of $9.2 billion to $9.5 billion, compared to analysts’ previous average forecast of $9.34 billion. Moreover, first quarter sales were $9.13 billion, slightly below the average estimate of $9.17 billion, while current accounts payable outstanding (CRPO) balances increased by 10%, well below the average estimate of $11.9 %.

The shortages came as software stocks deteriorated on the street overall. As I noted in my June 11 column, iShares Expanded Tech-Software ETF (NYSEMKT:IGV) fell from $85.13 on May 20 to $80.43 on June 7. I blamed the decline on weaker-than-expected quarterly results reported by a small number of software makers, including Salesforce, and the current concentration of large investors in the six largest technology companies and a few other hardware makers benefiting greatly from artificial intelligence Boom.

It continues to grow rapidly and generate impressive cash flows

Objectively speaking, the company’s business is growing relatively quickly and is quite profitable. In the first quarter, the company’s revenues increased by 11% compared to the same period a year earlier and maintained the full-year sales growth outlook at 8-9%. In terms of profitability, the company’s operating cash flow increased 39% year-over-year in the first quarter to a whopping $6.25 billion, and operating cash flow is still expected to increase from 21% to 24% for the full year.

At the midpoint of this range, operating cash flow would be $12.5 billion. This means that the company’s shares are changing hands, resulting in a relatively low valuation of 18.67 times expected future operating cash flows.

A viable AI strategy

Meanwhile, the company launched new software called Data Cloud. By providing its customers with the ability to compile data in a single source, Salesforce prepares them to easily leverage the artificial intelligence capabilities of Salesforce’s Einstein 1 platform to analyze that data. As a result, I believe that once Data Cloud is adopted by many customers, Salesforce will be able to convince them to use Einstein 1 to analyze and draw conclusions from the information they have compiled into the application.

So far, the strategy appears to be working, as it convinced over 1,000 enterprises to adopt Data Cloud for the second consecutive quarter in Q1, and 25% of deals that generated $1 million or more included a Data Cloud subscription.

Importantly, Salesforce revealed on May 21 that it had agreed to the use IBM (NYSE:IBM) large language models to enhance the artificial intelligence capabilities of the Einstein 1 platform. This should make Einstein 1 much more attractive to enterprises in the future.

Software rebound and Salesforce stock performance

Sometimes the Street is too negative towards certain sectors. For example, for the first few months of 2023, large investors lost massively in regional bank stocks. However, over the next year, most of the names in this sector eventually saw a huge rebound.

Software stocks should follow a similar trajectory over the next 12 months, ultimately boosting Salesforce stocks. Before such a rebound occurs, however, stocks are likely to be weak for some time. That’s why I now see Salesforce as a classic solution.

As of the date of publication, Larry Ramer did not hold (directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the author and are subject to InvestorPlace.com’s Editorial Guidelines