Salesforce normally trades at more than 20 times cash flow. It fell to eight times, and after last week's results it is back at 13 times near-term cash flow, which is where Sarat Sethi still finds it cheap.
The market's argument this year has been semiconductors against software, and software lost it. Sethi's position is that enterprise software companies embedded across a customer's operations are the hardest thing in technology to replace, and that the derating gave him the price.
"You had great earnings in technology. Stocks really didn't go too far. So it's going to be a show me story."
Sethi is a managing partner and portfolio manager at DCLA and a CNBC contributor, and his firm was buying Salesforce before the fall rather than after the jump.
I listened to the full segment so you can skip it.
Here are the 4 takeaways that matter.
👤 Guest: Sarat Sethi, managing partner and portfolio manager at DCLA and a CNBC contributor, whose firm owns Salesforce
🎙️ Host: Becky Quick, co-anchor of CNBC's Squawk Box
📰 Published: 1 September 2026 on CNBC (Squawk Box)
🔴 YouTube | 🔗 Episode page | ⏱️ 5 min
Key Takeaways
Rising oil and rising rates are a question about earnings, not only about inflation His worry is whether higher input and retail prices reach the high-income consumer who has carried spending
The out-of-favor sectors have already come back, which is what ends a cheap-versus-expensive market Health care, staples and software all recovered through earnings season
Technology reported well and the stocks did not move, so the next quarter has to prove the spending works He wants return on invested capital from the hyperscalers rather than more capital expenditure
Salesforce derated from more than 20x cash flow to 8x before recovering to 13x He was buying before the fall, not after the 22.6% jump
A large part of the Salesforce earnings beat was an investment gain rather than the business Strip it out and the show's arithmetic puts the increase at about 16%
1. Geopolitics Sets the Tone
The segment opened on a weak morning: Dow futures down about 335 points, S&P futures off by 50 and the Nasdaq down 300, with oil and Treasury yields both higher.
Sethi framed the next few days as thin trading with a geopolitical overlay. "Oil prices are rising, interest rates are rising." He expects volumes below normal into the holiday period, with the geopolitical story front and center
The transmission he cares about is earnings, not the inflation print. "And I think, you know, investors are looking to see how this is going to affect really the long term kind of earnings future, because not just the inflation piece, but you're going to get real prices going up."
The question he put to himself is which consumer absorbs it. "And how is that going to affect the consumer who is kind of, you know, in the K-shaped economy." He asked whether it reaches what he called the upper K, meaning the higher-income households that have carried spending He also expects input prices to matter again in the fall, once the back-to-school period is over and the underlying economy is visible
2. A Stock Picker's Market
Asked whether that made him nervous as an investor, Sethi answered on valuation rather than sentiment.
"I think, you know, we're pretty fairly valued here."
The recovery has already happened in the parts of the market that were left behind. "If you kind of come through earnings season, the areas that have done well are some of the areas that have been out of favor, whether it's been health care or staples." Software came back too
That removes the easy trade of buying whatever is cheap. "So really now it's going to be pockets of opportunity." The market is no longer split into an expensive half and a cheap half "Hey it's a stock pickers market."
Technology's problem is that good results stopped moving the stocks. "You had great earnings in technology. Stocks really didn't go too far. So it's going to be a show me story."
The specific test he is applying to the largest spenders. "Hyperscalers have spent a lot of money. Where's the return of investment." He named return on invested capital as the measure his firm looks for "And then investors are going to reward those that have true returns as opposed to just spending cash."
3. Salesforce at 13x Cash Flow
Quick raised Salesforce, which had reported the week before, and asked whether he liked the stock before the results or only after them.
The show's figures for the move. "First of all, Salesforce, which just reported its earnings last week, that stock was up 22.6%." Quick added, "I think it was its biggest one day gain since all the way back to 2020 after its earnings."
His answer was that the position predates the jump. "We did. So just to be fair, we started buying it when it was at this level before all the way down, you know, to the high 100."
The valuation arc is the whole case. A stock that normally trades at more than 20 times cash flow fell to a third of that. "Cash flow went all the way down to eight times. It's now trading at 13 times near term cash flow."
What changed the story was a partnership rather than anything Salesforce built alone, and the results showed no customer losses. "And really, you didn't see any loss of customers. You saw accelerated growth"
Buying it was uncomfortable because the market was positioned the other way. "But it was hard buying the stock because the semi against software trade was really strong."
The reason he thinks the derating overshot. "But I think when you look at some of these software companies that are embedded horizontally in enterprise, it's going to be hard to displace them."
4. Stripping Out Anthropic
Quick pressed on the quality of the quarter, with the show's own read of the numbers.
The show's arithmetic on the beat. "I think if you looked at it, revenue was up by about 11% year over year." Adjusted earnings per share were more than double the year-ago figure
Most of the bottom-line surprise came from a stake, not from operations. "But a huge portion of that bottom line beat was because of the investment gains that they got from Anthropic. I think that was a $2.6 billion investment gain. If you strip that back out, earnings were up about 16%." "The company didn't make a lot of point of telling people that."
Sethi accepted the correction and argued the stock is cheap even on the adjusted number. "I think you're absolutely right." At 13 times near-term cash flow against 16% growth, "I take that as a PEG ratio any day", meaning the multiple sits below the growth rate His own forecast is more conservative than the reported figure. "We actually think it's probably going to grow close to 10 to 12%." "Huge cash flow buying back shares."
He also accepted the ceiling that follows from it. "But I do think you need to strip out and say, hey, this is not a stock that's going to trade at 20 plus earnings." Higher interest rates and slower growth are why
Bonus Insights
Sethi's read of the market's structure is that the bifurcation is over: with health care, staples and software all recovered, what is left is a question about which companies execute over the next couple of quarters
The measure he named for the hyperscalers, return on invested capital, is the profit a company earns on the money it has put to work, and it is the number he says will separate the AI spenders from each other
The segment ran early in the morning against a falling futures market, and neither the guest nor the show treated the sell-off as more than the day's oil and rates story
Sethi's bottom line is that this is no longer a market where a whole style works, and that the way to own the AI build-out now is through companies whose returns on the spending are visible, which is the test he applies to Salesforce and to the hyperscalers alike.
Products, Companies & Tools Mentioned
Salesforce (Bought before the derating, now at 13 times near-term cash flow after a 22.6% one-day gain; he says horizontally embedded enterprise software is hard to displace)
Anthropic (The investment whose gain the show says accounted for a large part of Salesforce's bottom-line beat)
DCLA (Sethi's firm, which holds the Salesforce position he describes)
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