Jefferies, a global investment bank, has identified Salesforce, Inc. (NYSE:CRM) as one of the most crowded short software stocks among institutional investors. This comes as artificial intelligence (AI) continues to dominate discussions on Wall Street, with the upcoming earnings season expected to be heavily influenced by AI developments.
Salesforce, a major player in the customer relationship management (CRM) software sector, has seen its share price performance fluctuate throughout the year. Despite solid fiscal 2023 revenue of $19.4 billion, up 10% annually, shares dropped 19.8% by June 13th. However, investor sentiment shifted dramatically following the company’s second-quarter earnings report, leading to a 13% surge in aftermarket trading.
The optimism was partly driven by Salesforce’s Creative Cloud business, which includes AI models dubbed Firefly. The company increased its full-year revenue guidance to between $21.40 billion and $21.50 billion. However, this resurgence was short-lived, with shares falling 13.4% by September due to a lower-than-expected Q4 revenue projection.
These fluctuations reflect broader trends in the Software as a Service (SaaS) industry, which has seen valuation multiples and revenue growth estimates compressed in the AI era.
Salesforce short concerns amidst AI surge
Investor concerns regarding rising interest rates and competition from AI-developed software have impacted the sector.
According to Jefferies’ latest Trading Positioning Survey, only 19% of institutional investors were overweight on software stocks by October 2024, a significant drop from 51% in January. The number of shorted software stocks also decreased from 73 in July to 54 in October. Salesforce remains a critical player in the CRM software sector, holding a 21.7% market share in 2023.
The company leverages its significant data resources, offering an impressive 8 trillion data points to drive AI campaigns. However, as a SaaS company, Salesforce must balance growth and cost control. Investor concerns persist around Salesforce’s growth slowdowns, influenced by tight budgets and prolonged sales cycles.
Management aims to increase deal value by utilizing their “Data Cloud” platform, designed to centralize and empower AI insights across their Customer 360 suite. While Salesforce is recognized as a crowded short in the software stocks category, there may be potential for higher returns from other AI stocks within a shorter timeframe. Investors seeking promising AI stocks trading at less than five times their earnings may find more attractive opportunities elsewhere.
Noah Nguyen is a multi-talented developer who brings a unique perspective to his craft. Initially a creative writing professor, he turned to Dev work for the ability to work remotely. He now lives in Seattle, spending time hiking and drinking craft beer with his fiancee.
