This S&P 500 stock has become one of my largest holdings… here’s why

At the end of June, the S&P 500 average forward price-to-earnings (P/E) ratio was 22 times. That’s considerably above the 30-year average of 17 times. This tells us that investors are willing to pay more today for forward earnings. The average dividend yield is just 1.6%, below the 30-year high of 2.1%.

In this environment, it can be harder to pick stocks, especially if you value capital preservation like the very best investors. And this is the context in which I decided to open a position in Salesforce (NYSE:CRM).

A good price for growth

Salesforce trades at 24 times forward earnings, and that put it at a very modest discount to the information technology sector average. It has great profitability with a 77% gross margin and an EBITDA margin of 29%.

However, the most attractive ratio is arguably the price-to-earnings-to-growth (PEG) ratio. This stock’s ratio of 1.37 is a 27.4% discount versus the sector average, indicating that it could be undervalued versus its growth potential.

Interestingly, the stock has actually fallen 21% this year despite management boosting expectations. The company now expects revenue between $41bn and $41.3bn. This is an increase of $400m from the previous guidance and represents year-on-year growth of 8% to 9%.

Agentic AI push

Salesforce is aggressively advancing agentic AI through its Agentforce platform, aiming to redefine digital labour by integrating autonomous agents into business workflows.

Agentforce enables organisations to deploy AI agents that handle customer queries, automate case management, and drive faster lead qualification. This software is delivering 40% quicker results and powering over 100,000 AI-driven conversations since launch.

This rapid adoption is fuelled by Salesforce’s unified ecosystem, where Agentforce seamlessly connects with apps and Data Cloud, leveraging over 50trn data records for contextual, real-time responses.

With more than 8,000 customers already using Agentforce and a usage-based pricing model, Salesforce has lowered barriers for enterprises to experiment and scale agentic AI solutions.

It’s also practicing what it preaches. Salesforce CEO Marc Benioff said in June that “AI is doing 30% to 50% of the work at Salesforce now.”

The bottom line

Analysts often get it wrong, but it’s worth noting that Salesforce is among the most undervalued big tech stocks around according to the consensus price target. The average price target now sits at $347. That’s 31% above the current share price.

Of course, there are risks. There are host of companies developing agentic AI solutions that could pose a threat to Salesforce’s growth potential. This could put pressure on the share price as growth in its traditional enterprise solutions slows.

Nonetheless, its huge customer network and its apparent lead in agentic AI makes this stock a real winner for me. What’s more, the valuation simply isn’t very demanding. I certainly believe it’s worth considering.

The post This S&P 500 stock has become one of my largest holdings… here’s why appeared first on The Motley Fool UK.

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James Fox has positions in Salesforce. The Motley Fool UK has recommended Salesforce. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.