Can Salesforce Outpace Silicon Valley's AI Darlings?

Salesforce is making a bold move into the crowded field of enterprise AI. While newer entrants like OpenAI and Anthropic generate buzz with their chatbots, Salesforce is betting big on "agents" – a new generation of AI tools designed to go beyond conversation and actually perform tasks.

Parmy Olson of Bloomberg reports:

The company has just become the first major tech firm to launch a new breed of generative AI tools known as “agents,” which others on the cutting edge of the field have long talked about without delivering anything. And unlike its peers, Salesforce is explicit about how its novel tools will displace jobs. The approach is bold but could be what’s needed to push the firm ahead in the AI race as younger companies like OpenAI and Anthropic encroach on its territory.

This push into AI comes at an important juncture for Salesforce. Despite boasting a vast customer base, which includes "90% of Fortune 500 companies," the company recently reported disappointing Q2 earnings, missing revenue expectations and lowering its outlook. A "tougher spending environment" and extended sales cycles suggest that convincing businesses to embrace this new wave of AI won't be easy.

Agentforce: Automating Tasks, Confronting Concerns

Salesforce's new service, Agentforce, unveiled at their annual Dreamforce conference, promises to automate a wide range of tasks, from filing complaints to scheduling meetings. However, granting AI the power to take such actions naturally raises concerns. Allowing AI to directly "take action" could be a risky proposition for businesses. Given the tendency of generative AI to produce inaccurate information ("hallucinations") and documented cases of chatbots providing incorrect details, entrusting an AI with tasks like booking management could lead to serious errors.

Salesforce, however, claims to have addressed these concerns. Salesforce's corporate strategy director, Bill Patterson, told Bloomberg that "Hallucinations go down to zero because [Agentforce] is only allowed to generate content from the sources you've trained it on." This approach, according to Salesforce, contrasts with models like OpenAI, which are trained on vast and potentially unreliable public data.

Perhaps most striking is Salesforce's upfront approach to the issue of job displacement. This directness stands out, particularly because other AI companies often tiptoe around this sensitive topic. Salesforce is openly framing Agentforce as a cost-saving solution for businesses looking to reduce their reliance on human workers. This strategy is reflected in Agentforce's pricing model. Instead of charging per user, Salesforce will reportedly charge $2 'per conversation', incentivizing automation and potentially leading to job losses.

Will AI Translate to Financial Gains?

Early results from clients like John Wiley & Sons Inc. suggest the potential for significant efficiency gains. The publisher used Agentforce to "nearly halve the time spent answering customer inquiries," avoiding the need for additional staff during peak seasons. To further its AI ambitions, Salesforce has established a $500 million AI Fund, building on its existing $1 billion investment in the field. The company is also offering free AI training through its Trailhead platform, aiming to equip workers with the skills needed for this new era.

But whether these efforts will translate into financial success remains uncertain. Columbia Threadneedle, in its Q2 2024 investor letter, noted that Salesforce's stock "cratered" after its recent earnings report, citing a challenging environment for software companies:

In a tough backdrop for software companies, shares of Salesforce, Inc. (NYSE:CRM) cratered after the company reported quarterly results that surprised to the downside due to a tougher spending environment. The company reported revenue growth that missed on expectations, while also lowering its outlook for revenue growth, due to a more measured buying environment from its customers. Salesforce experienced elongated sales cycles, deal compression and elevated budget scrutiny, which pushed some deals to following quarters.

However, the asset manager also acknowledged the potential of Salesforce's "evolving AI story," particularly its integration across the company's extensive cloud and digital offerings.

Salesforce's aggressive AI push comes as the company seeks to reassure investors. As of this writing, Salesforce's stock is up 14% year-to-date, trailing the broader S&P 500's 22% gain.