Salesforce Has a $25 Billion Question Investors Aren’t Asking

Salesforce (CRM) reported a strong fiscal second quarter that investors waited to see, wherein revenue grew, cash flow surged, and management raised the full-year outlook. The company even announced returning an enormous amount of capital to shareholders while also trying to build out a much broader enterprise platform. But there’s a catch that investors might have overlooked.

Salesforce Is Growing Again, and the Profitability Picture Is Strong

In the second quarter, Salesforce generated $11.3 billion in revenue, which increased 11% year-over-year (YoY). Subscription and support revenue rose 12%, while current remaining performance obligations (or RPO) reached $33.5 billion. The massive RPO gives Salesforce a strong base heading into the second half of the fiscal year. The profitability picture also remained strong, with adjusted earnings per share up 103% YoY to $5.90 per share. 

Management also raised fiscal 2027 revenue guidance to land between $46.1 billion and $46.4 billion. The company expects subscription and support revenue to grow slightly above 12% for the year, while third-quarter revenue is expected to reach around $11.42 billion to $11.5 billion. However, there is a catch. Out of the $300 million increase in the full-year revenue guidance, only $100 million will come from organic improvement. Meanwhile, the other $200 million is expected to come from the planned Contentful and Fin acquisitions that it announced this year to strengthen its Agentforce AI platform. So investors should observe the quality of growth going forward, as most of the revenue improvement is expected to come from acquisitions and newer businesses rather than simply from its legacy software engine.

Then There Is the $25 Billion Buyback

Along with the Q2 results, management also announced executing a $25 billion accelerated share repurchase program. Through this program, the company plans to retire at least 14% of its outstanding shares, with the shares acquired so far at an average price of $176. Management described this program as a sign of confidence in the company’s future. For existing shareholders, the appeal is obvious as Salesforce is already incorporating the reduced share count into its full fiscal year outlook.

However, it also raises another question that investors may not be asking. The company is tying up billions of dollars for share buybacks at a time when it has plenty of areas where additional capital could potentially create value. Cash is king, and additional capital could fund acquisitions, strengthen products, or simply provide a larger cushion if growth becomes less predictable.

The buyback comes at a time when the company has planned to expand beyond traditional CRM into data, Slack, AI, IT service, supply-chain workflows, and other enterprise functions. Furthermore, it is also preparing to close the acquisition of Contentful and Fin. So, this $25 billion buyback raises the question of whether it was the best use of capital. 

Is the Buyback Actually a Disadvantage for CRM?

For now, Salesforce remains in a financially strong position, ending the quarter with $11.4 billion in cash, equivalents, and marketable securities. It also generated $1.1 billion of free cash flow during the quarter, an 81% increase from a year earlier. The company predicts operating and free cash flow to grow only about 4% to 5% in fiscal 2027, despite revenue growth of around 11% to 12%. Capital expenditures could be around 1.5% of total revenue. 

Essentially, Salesforce is asking investors to trust that revenue growth will accelerate while cash flow growth remains much more modest. At the same time, the company is committing $25 billion to buybacks. This creates two scenarios. If cash generation slows down for any reason, Salesforce will have less flexibility to cover an unexpected crisis or fund acquisitions. However, if the company eventually generates stronger-than-expected free cash flow, this concern will fade. 

Basically, at the moment, the buyout doesn’t look like a clear mistake or a reason to buy CRM stock. Rather, it is a bet that Salesforce is making that its business can generate enough future cash and growth to compensate for the financial flexibility it is giving up now. 

On Wall Street, CRM stock holds a consensus “Moderate Buy” rating. Out of the 53 analysts that cover the stock, 35 rate it a “Strong Buy,” while two recommend a “Moderate Buy,” 14 rate it a “Hold,” one suggests a “Moderate Sell,” and one suggests a “Strong Sell.” Despite the huge post-earnings bump, CRM stock is still down about 2% year-to-date (YTD). It is now trading close to its average target price of $270.98. However, its high target price of $475 suggests the stock could rally 81% over the next 12 months.