This Remains One of the Most Underrated AI Stocks
- - This Remains One of the Most Underrated AI Stocks
Daniel Sparks, The Motley FoolDecember 6, 2025 at 4:01 AM
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Key Points -
Salesforce posted another quarter of strong revenue growth as its adjusted operating margin continued to expand.
The company's AI offerings are seeing explosive growth.
The stock offers investors a good mix of AI growth initiatives and a well-diversified, profitable overall business.
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Salesforce (NYSE: CRM) reported record third-quarter fiscal 2026 results earlier this week, and the update pushed its AI (artificial intelligence) strategy to the foreground. The cloud-based CRM specialist's revenue continued to grow at a high-single-digit rate, and earnings per share soared. Management also lifted full-year guidance and pointed to surging demand for AI products layered on top of a powerful software-as-a-service business model.
Despite its business momentum, the stock remains sharply lower this year. This backdrop -- a strong business with exceptional momentum in AI combined with a stock price that remains in the penalty box -- makes Salesforce an intriguing way for investors to get intelligent exposure to AI. Going further, it's a good alternative to more hyped names such as Palantir Technologies (NASDAQ: PLTR).
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A bar chart with a trend line indicating a growth trend.
Image source: Getty Images.
Underlying business momentum
Highlighting Salesforce's overall business momentum, its revenue for its third quarter of fiscal 2026, ended Oct. 31, 2025, reached $10.3 billion, up 9% year over year, while non-GAAP (adjusted) operating margin climbed to 35.5% -- up from 33.1% in the year-ago quarter.
Importantly, Salesforce's current remaining performance obligations (RPOs) rose 11% year over year to $29.4 billion in the third quarter, and total remaining performance obligations increased 12% to $59.5 billion. These metrics, which offer a glimpse into the company's contracted future sales, help pinpoint the trajectory of demand for Salesforce's services.
Notably, Salesforce's free cash flow increased 22% to $2.2 billion. With so much excess cash flow and a healthy balance sheet, management was able to return $4.2 billion to shareholders through repurchases and dividends during the period.
With such a strong quarter behind it, it wasn't surprising that Salesforce raised its full-year revenue guidance to a range of $41.45 billion to $41.55 billion, which implies 9% to 10% growth for the year.
Salesforce's compelling AI growth story
Under the surface, Salesforce's AI-specific products are growing much faster than the company as a whole.
In Q3, for instance, Salesforce's AI offerings, Agentforce and Data 360, together generated nearly $1.4 billion in annual recurring revenue (ARR), up 114% year over year. Agentforce revenue alone now exceeds $500 million in ARR after more than quadrupling from a year earlier.
Those figures are still small next to Salesforce's more than $40 billion annual revenue outlook. But they show that AI is evolving into a meaningful driver on top of the company's core subscription base.
Management has been explicit about how that AI momentum ties back to the broader business. For instance, Salesforce CEO Marc Benioff said in the company's fiscal third-quarter earnings release that demand for Agentforce and related AI tools was a key driver in its 11% growth in current RPOs.
Overall, the latest numbers depict a large, profitable software company that is increasingly tapping into AI as an accelerant for its business -- and it's able to do this while generating substantial free cash flow and returning large sums of capital to shareholders via repurchases and dividends.
Salesforce versus Palantir
Highlighting why Salesforce is one of the best underrated stocks to tap into the growth opportunities being created by AI, consider how it measures up against Palantir -- particularly when it comes to valuation.
Palantir has become one of the purest AI bets in the public market. Of course, there's good reason for the hype; Palantir's third-quarter revenue rose 63% year over year to $1.18 billion.
But here's one key area Palantir drops the ball: As of this writing, Palantir trades at a price-to-sales ratio above 110 and a price-to-earnings ratio ratio close to 400 -- levels that bake in extremely optimistic long-term assumptions. Salesforce, by contrast, carries a price-to-sales ratio of less than 6 and a price-to-earnings ratio of 32.
The second reason Salesforce stands out compared to Palantir is its comparatively established and diversified business. Salesforce's AI initiatives sit on top of a diversified cloud software suite that many enterprises already rely on for sales, service, and data workflows. This means that Salesforce has a strong business even without AI. Salesforce's AI offerings simply deepen engagement with services that were already successful before AI became a driving force for its business. So the investment thesis for Salesforce isn't entirely dependent on a new, speculative technology. For Salesforce, therefore, AI is just the icing on the cake for its diversified software business.
Meanwhile, Palantir's business is built entirely on its AI data platform. Palantir's narrower focus on data analytics platforms, along with its significant dependence on defense-related work, may deliver faster growth if everything goes right. But it also concentrates risk. A slowdown in big-ticket government contracts, a pause in commercial AI experimentation, or a shift in its customer base toward tools from deep-pocketed public cloud providers could have an outsize impact on Palantir's results. With valuation multiples already far above even other software leaders, the margin for error is thin.
Of course, investors also need to consider Salesforce's own limitations. Even with AI gaining traction, overall revenue growth has cooled from the teens a few years ago to high-single-digit rates today -- and AI-related annual recurring revenue of about $1.4 billion is still only a modest slice of the full-year revenue outlook above $41 billion.
Overall, however, Salesforce looks like a much better investment idea than Palantir, in part because of its more diversified and established business -- but mainly because of its significantly cheaper valuation. Indeed, I'd argue that Salesforce is one of the market's most underrated investment ideas in the AI space.
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Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies and Salesforce. The Motley Fool has a disclosure policy.
Source: “AOL Money”
