Key Takeaways
- S&P cut Salesforce’s credit rating to A from A+ last week, citing rising acquisition activity and shareholder returns, while keeping a stable outlook.
- Salesforce agreed to buy Braze for about $5.66 billion in October and Cresta in November, after a $3.6 billion deal for Fin earlier this year.
- Informatica supplies slightly more than 4 points of Salesforce’s guided growth, while ServiceNow grew revenue 20.5% last quarter.
- The third-quarter report, expected in early December, has to show the organic revenue reacceleration management keeps promising.
Salesforce (CRM) took a credit downgrade last week, and you can see the reason in its deal log.
S&P Global Ratings cut the company to A from A+ on November 4. The agency pointed to rising acquisition activity and shareholder returns. It kept a stable outlook, though, and still expects subscription revenue and earnings to grow.
The downgrade came two days after Salesforce agreed to buy Cresta, a private voice AI company. Two weeks before that, it struck a deal for Braze (BRZE), the customer engagement platform, at about $5.66 billion in cash. Braze shares jumped more than 50% that day.
Salesforce stock slid through most of last week. Meanwhile, ServiceNow (NOW) just grew revenue 20.5% in its third quarter, nearly double Salesforce’s pace.
Three deals and a downgrade
The leverage built up in stages this year:
- In March, Salesforce sold $25 billion of senior notes to fund a $25 billion accelerated share repurchase.
- In June, it agreed to buy Fin for about $3.6 billion, alongside a separate deal for Contentful.
- Braze and Cresta followed in October and November. Salesforce didn’t disclose Cresta’s price, and The Information reported it at $2.7 billion.
Moody’s had already trimmed Salesforce to A2 in March over the debt-funded buyback. So S&P is mostly catching up to a balance sheet that changed months ago.
Both agencies still rate the company solidly investment grade. Yet the bill isn’t finished, because Braze and Cresta are both expected to close in fiscal 2028, which starts in February.
Buying growth while waiting for it
On paper, each deal fills a gap. Braze brings real-time messaging for about 2,770 customers to Marketing Cloud, and Cresta adds voice agents used by Marriott and Comcast to Service Cloud.
Shay Boloor of Futurum Equities told Reuters that Braze gives Salesforce “a real-time engagement layer that its marketing business has historically lacked.”
Organic growth is the harder question. Second-quarter revenue rose 11% to $11.3 billion, but Informatica contributed $456 million. Third-quarter guidance calls for 11% to 12% growth, and slightly more than 4 points of that also comes from Informatica.
Put the two software leaders side by side and the gap is hard to miss…
ServiceNow grew subscription revenue 21% last quarter. That pace makes Salesforce’s high single-digit organic growth look slow, even with acquisitions layered on top.
AI is the brightest spot. Agentforce and Data 360 ARR reached nearly $3.9 billion, up more than 210%. CFO Robin Washington said new bookings grew at their fastest pace in four years, keeping Salesforce “on track for second-half organic revenue reacceleration.”
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Cash flow now has more jobs
Salesforce guides fiscal 2027 free cash flow up only about 4% to 5%. That cash now covers the dividend, buybacks, interest on the March notes, and over $9 billion of announced deals.
So how much of the cash has already gone back to shareholders?
Second-quarter free cash flow rose 81% to $1.1 billion. Even so, the buyback has far outrun what the business throws off in a quarter.
Profitability isn’t the problem. Salesforce posted a 34.1% non-GAAP operating margin in the second quarter and expects 34.3% for the full year.
My take: The downgrade itself changes little, since an A rating still leaves plenty of room. What bothers me is the sequencing. Salesforce is borrowing for buybacks and buying growth while organic revenue sits in single digits. If Agentforce keeps compounding, these deals will look like smart accelerants. If not, they become an expensive way to rent a growth rate.
The third-quarter report, expected in early December, is the test. Management guided revenue of $11.42 billion to $11.5 billion and cRPO growth of about 14%, and that cRPO figure excludes Contentful and Fin. A clean beat there would say the organic engine is turning.
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Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. Our analysis might not include recent company news or important updates. TIKR has no position in any stocks mentioned. Thank you for reading, and happy investing!
