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We raise our fair value estimate for wide-moat Salesforce CRM to $315 per share from $290 after its third-quarter results, while fourth-quarter guidance was slightly shy of our expectations. Still, third-quarter strength more than makes up for the modest guidance differential. Management is very enthusiastic about Agentforce, which we think represents a good long-term opportunity to transition from a mostly human agent labor force to a mostly virtual agent pool over time.
Shares have run dramatically and are up 45% to 50% over the last three months, assuming the 9% after-hours surge holds. Even with our fair value increase today, we see shares as overvalued. Our revenue estimate for next year is 1% above FactSet consensus, while non-GAAP operating margin is approximately in line, and shares are trading above our fair value estimate.
To support shares at these levels, investors must believe Agentforce will drive more top-line acceleration or that margin expansion will come faster and prove greater. Both of these things can happen, but we would prefer to see any evidence of the former before we allow our excitement levels to catch up with the stock. Additionally, shares from much of our software coverage have generally performed well over the last several months despite no real change in fundamentals, so investors must be incorporating a more pro-growth stance, including further rate cuts, from the incoming administration.
Despite continued macroeconomic pressures, demand came in better than expected, with broad-based strength supporting growth. Current remaining performance obligations, or CRPO, accelerated, which bodes well for revenue acceleration in the coming quarters. Total revenue rose 8% year over year (8% in constant currency) to $9.444 billion versus the high end of guidance at $9.360 billion. CRPO grew 10% year over year, accelerated sequentially, and outpaced subscription revenue growth, which are all positive indicators.
Demand for Agentforce
Drilling down on revenue performance in the quarter, both subscriptions and services were ahead of our model, with the former growing 9% as reported and the latter contracting 2% year over year. All segments came in better than we expected, except for data cloud, which was pressured by very strong performance a year ago in license sales for both Tableau and MuleSoft. Multicloud deals continue to perform well, with each of the top 25 deals in the quarter including more than five clouds each.
Additionally, even though Agentforce was just launched in the last week of the quarter, demand was very strong, with 200 deals and a very robust pipeline. We think Agentforce has the potential to drive the revenue acceleration investors may be baking into the recent stock rally. From a segment perspective, health and life sciences, manufacturing and automotive, and energy all performed well, while retail and consumer goods both moderated.
While profitability remains a source of strength, we see a path for continued margin expansion even as the firm invests in artificial intelligence innovation. Non-GAAP operating margin was 33.1% versus 31.2% a year ago. As benefits from the major restructuring actions from January 2023 fade, the internal cultural shift around profitability remains apparent, and we expect operational efficiencies and pricing to serve as tailwinds to margins over the next couple of years.
Management characterized the demand environment as unchanged, which is fairly consistent with the rest of our coverage. Combined with the nice upside to the quarter, we interpret guidance more as in line than slightly light. For the fourth quarter, management guided to $9.90 billion-$10.01 billion in revenue and $2.57-$2.62 in non-GAAP EPS.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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