A new piece of Wall Street research prompted us to change our rating on Salesforce

For the better part of the last decade, we've heard that software is eating the world

But now it seems AI is eating software

That's the call analysts at Melius Re are once again making Monday as they downgraded one-time market darling Adobe to a sell rating

The attention-grabbing note highlights the far-reaching ripple effects that artificial intelligence is having across the stock market — and investors must be attune. name Salesforce is in the crosshairs of the shifting landscape, and we cannot ignore that fact

In Melius' view, the rise of AI is to software what the rise of cloud computing was to on-premise data centers

Historically, companies would maintain their own data centers in-house, requiring massive investments in hardware and teams of engineers there to maintain and troubleshoot any issues

Today, however, companies can outsource this simply by hopping on the cloud computing bandwagon, utilizing the s of Amazon Web Services, Microsoft's Azure and Alphabet's Google Cloud

The rise of the cloud was bad news for the stocks of on-premise hardware viders such as Dell , Hewlett-Packard and IBM

As this shift to cloud computing took hold, Melius noted that these companies all saw a steep contraction in their price-to-earnings multiples, a classic sign that investors believe slower growth is ahead. "Just when you thought the coast was , their PE multiples kept going lower and lower — from the 20s to mid-single digits," Melius wrote Monday. name Microsoft was also a key vider of software for on-premise servers

However, Microsoft did adjust its strategy with the launch of cloud service Azure

Microsoft would have no doubt been on that list of on-premise fallen angels — even if not a hardware play Hewlett-Packard and Dell — had they not jumped on cloud computing and instead kept their fate tied to the on-premise hardware viders

Azure is the No. 2 cloud by revenue behind AWS and is seeing growth reaccelerate thanks to AI

The lesson from Microsoft: If you're model is being disrupted, you can still adapt, survive and thrive

However, if you're getting disrupted and fail to adapt, then the valuation that investors are willing to pay for your stock will reflect that failure

Instead, the investors will move on to owning the disruptors in question, which, in the present moment, are the AI players pushing into the software-as-a-service space

Often abbreviated as SaaS, this model was all the rage not too long ago itself

Instead of companies paying for a perpetual license to use a specific version of software, SaaS companies sold their duct on a subscription basis, bringing in a more predictable recurring revenue that investors were willing to assign a higher multiple

It often involves a "seat model," where companies pay based on the number of employees using the software

Melius believes it's under real threat. "We think companies are increasingly understanding that AI tools can help cut expensive knowledge workers with those costly SaaS seats

In fact, opex is going down as a percent of sales across leaders since the AI boom started

One of the ways they are doing it is reducing workers who typically are the biggest consumers of SaaS ... and Adobe could be impacted as other companies catch on," the Melius analysts wrote in their downgrade

They added, "We think there will be FOMO across all industries to cut costs and get their stocks up - SaaS is the casualty as AI adoption accelerates." To be sure, while this is a potential concern for Salesforce, plenty of other names in the portfolio stand to benefit

Among them are Microsoft and Amazon because their cloud services are enabling others to leverage AI

Indeed, the Melius analysts themselves contend: "While SaaS should be avoided, 'Software' companies with clouds [such as Microsoft and Oracle] are continuing to see acceleration in demand." "Another area fueling demand is the acceleration of AI agents that do the work of SaaS and fuel demand for more compute," Melius added

Agentic AI is a type of AI system that can complete certain tasks without human intervention, and it's become a big area of investment and focus in the AI race — including for Salesforce

In that way, Salesforce occupies both sides of a tricky situation

It's both a SaaS company and a company that's recognized how transformative AI can be

That's why we were torn as we read Melius' re Monday

On the one hand, we think Melius makes some pretty good points

After all, we are seeing companies do more with less thanks to generative and agentic AI

And given that SaaS is generally based on the seat-based licensing model, if Salesforce's customers have fewer employees because their remaining ones are using AI to be more ductive, that translates to less demand for software seats — all else being equal

We also do believe AI is a once-in-a lifetime nology that will have implications far wider reaching than the shift to cloud did over the past decade

On the other hand, Salesforce in particular remains a critical tool for companies across industries and a best-in-class vider when it comes to customer relationship management (CRM) software

Salesforce also isn't standing idly by

Instead, the company is working to build out its agentic AI offering, appriately dubbed Agentforce, so that it can help clients move more quickly into the AI era, while also building out a new AI-oriented revenue that can hopefully help extract more revenue from those seats at customers that do remain

Un Adobe, it's also important to keep in mind that Salesforce is targeted almost exclusively toward enterprise, where the customer cohort tends to be more sticky and a bit slower to change things up, lest they risk a misstep that hurts sales

While Salesforce isn't alone in offering tools to build Agents — Microsoft, which competes with Salesforce in the CRM arena, also has them — the company ly has a strategy

In the end, we aren't ready to bail on Salesforce just yet, though we understand the market's concern with the SaaS space

Salesforce is still a great house, but the neighborhood is deteriorating

And as any good real estate agent will tell you, it's location that matters above all

As a result, we're downgrading s of Salesforce to a hold-equivalent 2 rating as we look to better understand to what extent Salesforce is being disrupted, or if can indeed adapt to the new world

While the stock is already down a lot this year, and we believe in the management team, it's the of in the numbers that we need to see before getting more optimistic. (Jim Cramer's Charitable Trust is long CRM

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