Salesforce thinks AI will help it beat Microsoft and Oracle

Marc Benioff, chairman and chief executive officer of Inc.
David Paul Morris | Bloomberg | Getty Images founder Marc Benioff has done his part to revolutionize the software industry, and he's far from done.

Back when Benioff was a top executive at Oracle in the 1990s, salespeople stored client and prospect data on proprietary machines that required expertise to use. Marketing teams had separate tools as did customer support representatives. Data was siloed, limiting the capabilities of analysis and business intelligence software.

Fast forward two decades and Benioff hast turned that model on its head. Salesforce is a $50 billion enterprise that businesses rely on to connect their sales, marketing, support and financials in the cloud — a term that didn't exist when the company was launched in 1999.

Rather than mimicking Oracle and trying to do everything, Salesforce has enabled scores of niche software developers to plug their apps into the platform and get instant access to many thousands of prospective customers. AppExchange, as it's known, features more than 3,000 products, some from companies that have built billion-dollar businesses on top of Salesforce.

Now that Salesforce has over 150,000 businesses spending $8 billion a year on its customer relationship management (CRM) software and other products, Benioff is attempting to take the next giant step into the future.

Enter artificial intelligence.

Will Artificial Intelligence be embraced?

At next month's Dreamforce, Salesforce's mammoth annual customer conference that takes over downtown San Francisco, the company will introduce technology called Einstein, which it's describing as the "world's first comprehensive AI for CRM."

On the company's second-quarter conference call in August, Benioff called it "AI for everyone."

Salesforce executives on Thursday gave a group of reporters an early look at Einstein in preparation for the unveiling. The general idea, as the name implies, is that sales tools are getting a whole lot smarter.

Who are the best prospects to call this week? Which leads are most likely to become prospective clients? Why am I getting outsold by my competitors in certain markets? How long will it take a deal to close?

These are the types of questions that Einstein aims to answer, in turn leading to more frequent conversions and more efficient sales teams. The same technology can be applied to marketing, customer support and commerce data, thanks to a team of 175 data scientists and a string of deep technology acquisitions.

Developers on AppExchange will get to utilize the same AI software in deploying their own apps.

"Each and every product that we market and sell will be impacted by AI," said Alex Dayon, president and chief product officer at the San Francisco-based company. "It's really an investment for the long run."

According to CB Insights, more than 30 private companies working to advance artificial intelligence have been acquired in the past five years, and Salesforce has been among the most active buyers along with Alphabet, Intel and Apple. Salesforce's Chief Scientist Richard Socher joined the company in April through the acquisition of deep learning start-up MetaMind.

Salesforce vs. S&P 500

Investors know Einstein is coming but they've yet to get much detail on it. Of late, they haven't been so bullish. The stock has dropped 6.5 percent this year, while the S&P 500 has gained 4.7 percent.

Still, the company is richly valued compared to its peers at 6.8 times revenue, compared with a price-to-sales ratio of 4.4 for Oracle, 5.4 for Microsoft and 1.8 for IBM, according to FactSet.

"All eyes shift to Dreamforce in early October with the release of Einstein and discussion around long-term targets," Joel Fishbein, an analyst at BTIG, wrote in a Sept. 1 report, following Salesforce's earnings release. "The company has invested heavily in artificial intelligence (six deals in the past 12 months), and they believe imbuing their platform with machine learning will be the next catalyst for sustained growth."

Fishbein has a buy rating on the stock and a $100 price target, 36 percent above Friday's close of $73.29.

One major challenge for Salesforce is renewed competition from Microsoft. While the software giant badly trails Salesforce in CRM, Microsoft is using its dominance in other areas of enterprise technology along with its Azure cloud infrastructure and $100 billion-plus cash pile to regain relevance.

Microsoft outbid Salesforce for LinkedIn, giving its customer database called Dynamics a huge data infusion. LinkedIn's network has more than 450 million members who have populated the site with their professional information, potentially providing a whole new way for Microsoft to target workers with relevant stories and connections.

Cramer: Salesforce's Benioff earned the right to be taken at face value

Last week, Microsoft Dynamics nabbed HP's CRM business in a six-year deal. Tom Roderick, an analyst at Stifel, said Microsoft is displacing Salesforce and Oracle at HP.

"The move will raise some eyebrows among investors in the cloud world as it is one of the strongest acknowledgments of MSFT's CRM suite we have seen," wrote Roderick, who rates Salesforce a buy.

Salesforce's Einstein press release has all the buzz phrases, such as deep learning, predictive analytics and natural language processing.

Should it all work together as planned, the dream scenario for Salesforce is that its technology becomes so valuable that existing customers buy more of it, and businesses currently favoring Microsoft opt to give Salesforce another look.

Salesforce reached $5 billion in annual sales faster than any enterprise software company, and Benioff's goal is to top $10 billion in record time. Analysts predict Salesforce will get there late next year.

In striving for that milestone, Benioff told CNBC'S Jim Cramer on "Mad Money" earlier this month that AI is among the next big growth drivers.

"It's amazing what is now possible, whether it's machine learning, deep learning, machine intelligence that we're able to do today that we weren't able to do just a couple of years ago," Benioff said. "Our customers are going to get that for the first time in October."