Salesforce (CRM): Can Margin Gains and AI Ambitions Justify the $404 Price Target?

In the ever-evolving tech landscape, few companies straddle the line between legacy software titan and AI-driven innovator as deftly as Salesforce (CRM). Yet, investors are grappling with a critical question: Can Salesforce's margin trajectory—now showing signs of stabilization—overcome lingering concerns about its core CRM business, while its ambitious AI investments like Agentforce and Data Cloud deliver enough growth to justify a $404 price target? The answer hinges on whether Salesforce's margin softness was a temporary stumble or a symptom of deeper structural issues, and whether its AI pivot is more than just hype.

Margin Momentum or Mirage?
Salesforce's Q1 FY26 (ended April 30, 2025) delivered a stark contrast to its recent struggles. GAAP operating margins surged to 18.7%, a 1,370-basis-point jump year-over-year, while non-GAAP margins hit 32.1%, up 450 basis points. These gains, fueled by cost discipline and operational efficiencies—such as retraining 500 employees to save $50 million annually—suggest Salesforce is finally reaping the rewards of its years-long restructuring. But skeptics argue the numbers mask deeper challenges.

The Professional Services segment, for instance, posted a 2.9% year-over-year revenue decline, hinting at potential inefficiencies or weaker demand for implementation services. Meanwhile, Salesforce's $8 billion acquisition of Informatica, while positioning it to dominate data integration, carries near-term integration costs. Compounding concerns, the company lowered its FY25 Subscription & Support Revenue growth to “slightly below 10%,” citing macroeconomic pressures.

The critical question is whether these headwinds are seasonal or structural. CFO Amy Weaver insists the margin improvements are “disciplined and durable,” rooted in long-term strategies like shifting to consumption-based pricing (Flex Credits) and geographic expansion in high-growth markets like India and Japan. With 30% of Agentforce bookings and 50% of Data Cloud bookings now tied to Flex Credits, Salesforce is aligning revenue with actual usage—a model that reduces reliance on fixed-seat licensing and stabilizes margins over time.

AI's Double-Edged Sword: Growth or Overinvestment?
Salesforce's $404 price target—set by Morgan Stanley—relies heavily on its AI initiatives. Agentforce, launched in late 2023, has already generated over $100 million in ARR, with 4,000 paid deals. Its internal adoption by Salesforce's sales teams has saved 44,000 hours annually, showcasing scalability. Meanwhile, Data Cloud, which now hosts 22 trillion records, has hit $1 billion in ARR, up 120% year-over-year.

But the path to profitability isn't without risks. Competitors like Microsoft (with Dynamics 365 and Copilot) and Google (with Vertex AI) are aggressively integrating AI into their CRM stacks, while Salesforce's own R&D spending on AI could strain margins in the short term. The Informatica deal, though transformative, faces investor skepticism—shares dipped 3% post-earnings as doubts linger about its integration.

The Case for 20x EV/FCF: Is It Reasonable?
At its current valuation, Salesforce trades at roughly 16x EV/FCF, a discount to its historical average and peers like Adobe (23x EV/FCF). To reach the $404 price target—a 25% premium to its June 19 closing price—Salesforce must convince investors that its margin trajectory and AI growth justify a 20x EV/FCF multiple.

The catalysts are clear:
1. Margin Resilience: Non-GAAP margins are on track to hit 34% by FY28, buoyed by Flex Credits and cost efficiencies.
2. AI Scalability: Agentforce and Data Cloud could account for 20% of total ARR by 2028, with Data Cloud alone projected to hit $2.5 billion in ARR.
3. Geographic Diversification: APAC and EMEA growth (11% and 9% year-over-year) are outpacing the sluggish U.S. tech sector.

The Bottom Line: Buy the Dip, but Stay Vigilant
Salesforce's Q1 results suggest its margin softness was more seasonal than structural. The company's focus on AI-driven recurring revenue, cost discipline, and geographic diversification positions it to sustain margin expansion. While risks remain—Informatica's success, macroeconomic headwinds, and AI competition—the long-term narrative is compelling.

Investors should add to positions on dips, particularly if the stock slips below $300. A 20x EV/FCF multiple is achievable by FY2028 if margins hit targets and AI products deliver on their promise. Salesforce's $404 price target isn't a stretch—it's a bet on a tech giant reinventing itself for the AI era.

Risk Factors to Monitor:
- Informatica Integration Timeline: Any delays could dent margins and sentiment.
- Agentforce Adoption: Slower-than-expected enterprise adoption could cap ARR growth.
- R&D Costs: Escalating AI investments might pressure margins temporarily.

In the end, Salesforce's ability to turn margin gains and AI momentum into sustained valuation re-rating will determine whether its $404 target is a triumph or a trap. For now, the odds are stacked in its favor.