3/2/2023

Welcome, everyone, to the latest debate. Big moves in enterprise software, with Salesforce spiking on a beat and promises of margin improvement, and Snowflake sinking on light guidance. So which is the better long-term bet? Jon Fortt is here to weigh in.

JON:

“Snowflake is the better bet.

It's at about a $50 billion market cap, and is growing like crazy. I know the stock was down after hours on the guide, but I think some people are misinterpreting that. Snowflake operates on a consumption model, not a subscription model. And with the global economy slowing down, customers are buying access by the fork-full rather than by the plate-full. That doesn't mean they're going to consume less, it just means they're conserving cash. Snowflake did say some newer customers are ramping up their usage more slowly than new customers did in the past. But that's because some customers were spending like drunken sailors. You'd expect that to stop. Beyond all that, the reason Snowflake is a better bet is its strategy to become a place where developers can build fast, efficient apps that sift through massive amounts of data. If that sounds like the perfect fit for the AI era? It is. CEO Frank Slootman called Snowpark the biggest expansion of Snowflake's scope as a company since 2015. It's nice that Salesforce discovered efficiency after activists ganged up on them. The stock got a nice short-term pop. But Snowflake has been driving efficient growth all along.”

Marc Benioff is a pretty competitive guy. You don't think he can sustain this turnaround?

JON:

“On the other hand, don't bet against Benioff.

Salesforce had an impressive quarter, 17% constant currency growth a guide to 27% operating margins. And I think it's because these activists put a target on him. Over the past few years, Salesforce has had a co-CEO structure that worked fine in expansion mode, where you're scrambling to hire all the talent and engage all the customers. Things shifted fast. Now that Bret Taylor's gone, and Stu Butterfield's gone, and the economic mandate is to drive efficiency, Salesforce needs decisive leadership to identify the highest priorities and cut the other stuff. This attack by activists has given Benioff exactly the cover he needs to make those painful cuts and unpopular choices that would have drawn protests a few months ago. The test now will be to drive efficient, organic growth, since investors don't have the stomach for big M&A. That's going to mean rewriting some software to be more flexible for the AI era in enterprise software. But don't underestimate the effectiveness of a founder who understands the assignment and has a sense of urgency. Benioff has the scale, the loyalty and the leadership to bring Salesforce a win.”

What do you think? Which side do you find more convincing, and why? Watch how it played out on Squawk Box below: