The Long and Short
CRM oversold on financial policy, AI threat
This material is a Marketing Communication and does not constitute Independent Investment Research.
One of the most prominent sources of perceived risk in credit markets today is the looming threat of AI obsolescence. Various industries have seen risk repriced recently as investors contemplate the threat from AI. Perhaps none have been more prominent than traditional enterprise software companies and lenders to those institutions. Pressure for Salesforce Inc (CRM: A2/A+/A) has been twofold for the past several quarters after management adopted a more aggressive financial policy earlier this year. Both potential concerns appear more than adequately priced at current valuation of CRM’s credit spreads.
CRM bonds have appeared increasingly oversold as spreads have drifted 15 to 20 bp wider in the long end of the curve since the company last reported operating results for F1Q27 in late May. The issuer is now the absolute widest trading credit for all single-A rated paper in the technology sector (Exhibit 1). This is particularly true for longer-dated instruments given the uniquely steep nature of the issuer’s credit curve. This presents an opportunity for credit investors seeking outperformance relative to the rest of the sector, many of which face similar if not worse existential pressures from AI disruption.
Exhibit 1. CRM credit curve versus single-A rated technology sector
Source: Santander US Capital Markets LLC, Bloomberg/TRACE G-spread indications only
The broader technology sector has experienced heightened volatility as extraordinary issuance from the hyperscalers over the past year has created supply pressures in the market (Exhibit 2). This trend should continue as extraordinary capex needs over the next several years to fund the ongoing AI buildout should fuel further new issue volume amongst these five or six issuers. Although CRM management remains opportunistic with regard to future acquisitions and has expressed willingness to potentially sacrifice ratings for the right target, M&A risk appears mitigated by highly manageable capex needs relative to the hyperscalers’ massive spending plans. Comparative to capex projections that are coming in excess of annual operating cash flows for the hyperscalers, CRM management expects spending to remain at about 2% of revenue for foreseeable future.
Exhibit 2. CRM credit curve versus hyperscalers (plus SPCX)
Source: Santander US Capital Markets LLC, Bloomberg/TRACE G-spread indications only
CRM added to the trend of jumbo technology issuance back in March with an 8-part $25 billion debt deal in the US dollar market. Unlike the hyperscalers and chipmakers that have brought similar size to the market year-to-date, CRM’s debt launch was specifically to fund a previously announced accelerated share repurchase (ASR) plan of $50 billion. This more aggressive financial policy from management led to a $27.5 billion payout last quarter which was almost entirely funded by the debt launch. The announcement came after management had already introduced a $1.5 billion dividend policy at fiscal year-end 2025.
CRM is the third largest global software company by annual revenues behind Microsoft and Oracle and is the market leader in the customer relationship management category by over 4x to the next closest competitor. It is estimated that about 90% to 95% of CRM revenue comes from traditional software subscriptions and service contracts with about 5% to 10% generated for AI-specific products. Those numbers are broadly anticipated to shift to a much larger portion of AI over the next several years with strategic initiatives underway. For example, CRM’s Agentforce Apps platform, which enables customers to build AI agents, went live in 2024 and is averaging 7% revenue growth quarterly since then.
Meanwhile, AI disruption risk over the near-to-intermediate term is also mitigated by the company’s strong backlog of contracted revenues, as well as the company’s expanding foray of AI-driven offerings. In fiscal first quarter earnings results, CRM’s current RPO (remaining performance obligation – or contracted revenues) increased 14% year-over-year to $33.6 billion. Total RPO was reported at $67.9 billion up 11% year-over-year (largely fueled by the Informatica acquisition) or about 1.5x lagging 12-month revenue. FY2027 revenue guidance was $45.9 billion to $46.2 billion and management is projectig annual revenue of over $63 billion by FY2030.
CRM’s last major acquisition was the purchase of Informatica in a roughly $8 billion all-cash acquisition that closed in November 2025. For financing, management used a $6 billion 5-year term loan (due 2031) to refinance short-term debt associated with the transaction. The rest of the company’s near-term liquidity profile remains extraordinarily stable and well-positioned for further M&A. CRM has just under $12 billion in cash currently on the balance sheet, plus a $5 billion undrawn revolving credit facility through 2029. Near-term liquidity needs are limited to a $6 billion debt maturity in 2028, a $4.25 billion maturity due in 2029, and $5.25 billion due in 2031 (the same year as the $6 billion term loan). Annual free cash flow was $12.4 billion last FY2026 and is projected to exceed $12 billion in the current fiscal year, offering plenty of funding available for the remaining $25 billion on the accelerated share repurchase plan announced earlier this year.
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