Software spending strategies under scrutiny amid AI disruption
Speakers
Deirdre Bosa — CNBC Anchor
— CNBC anchor, tech reporter
Summary
- Salesforce is reportedly raising up to $25 billion in debt to fund stock buybacks, effectively tripling its debt load.
- Despite growing at nearly 170% year-over-year, Salesforce's AI platform, Agentforce, still accounts for less than 2% of total revenue.
- Salesforce pays roughly $3.5 billion annually in stock-based compensation, meaning a significant portion of the debt-funded buybacks will merely offset dilution rather than return capital to shareholders.
- The market is bifurcating the software sector, rewarding growth-oriented SaaS names while punishing legacy players relying on financial engineering.
- Big tech peers are also tapping debt markets, but are utilizing the capital to build AI infrastructure and fund future growth rather than buying back stock.
Trade Ideas
"Salesforce, the poster child of the software sell off, tripling its debt to prop up the stock price is a gamble that AI disruption fears are overblown... Agent Force is actually still less than 2% of total revenue." Borrowing heavily to fund stock buybacks instead of investing in AI infrastructure or M&A signals that management lacks organic growth ideas. Furthermore, these buybacks largely serve to mask the dilution from $3.5 billion in annual stock-based compensation, making the company look more like a legacy tech stock (e.g., old IBM) than an AI pioneer. AVOID CRM as its reliance on financial engineering fails to address underlying concerns about AI disruption and slowing core growth. Management's conviction is correct and the stock is truly undervalued, or Agentforce adoption accelerates enough to meaningfully impact the top line.
"While other software names like ServiceNow, Datadog, Shopify, well, they have bounced this month, Salesforce is flat, so the market is starting to pick favorites in the SaaS selloff." Investors are actively rotating capital within the software sector, moving away from legacy names struggling with growth and into resilient SaaS companies that are successfully navigating the AI transition. LONG NOW, DDOG, and SHOP as they are emerging as the market's preferred winners in the current software environment. A broader macroeconomic downturn or a sector-wide SaaS multiple compression could drag down these names regardless of their individual outperformance.
"Others like Amazon and Oracle, even Alphabet, they are borrowing but they're not borrowing for buybacks. They're borrowing to fund growth. Many of them are spending on infrastructure which will bolster the AI bet." Companies that leverage debt to build out capital-intensive AI infrastructure are creating deep competitive moats and securing future revenue streams. This productive use of debt positions them to dominate the next technological era, unlike companies borrowing purely for financial engineering. LONG AMZN, ORCL, and GOOGL as their debt-funded infrastructure investments will drive long-term AI leadership. The return on investment for AI infrastructure takes longer than expected to materialize, leading to bloated balance sheets and investor impatience.
