Better Cloud Stock: Adobe vs. Salesforce

adobe (ADBE 0.01%) and sales (CRM 1.71%) These are two of the world’s largest cloud software companies. Adobe has been transitioning from desktop-based media software to cloud-based services over the past decade, and Salesforce has the world’s leading cloud-based customer relationship management (CRM) platform. Both companies also offer additional sales, marketing, e-commerce and analytics services.

Adobe and Salesforce both hit record highs at the peak of the rise in growth stocks in November 2021. However, both stocks declined over the next two years as rising interest rates forced investors to invest more conservatively. Should you invest in one of these cloud giants before the market heats up again?

Image source: Getty Images.

Adobe is facing slowing growth and regulatory challenges.

Adobe’s revenue grew at a compound annual growth rate (CAGR) of 19% from fiscal 2017 to fiscal 2022 (ended December 2, 2022). However, revenue is expected to grow only 10% in fiscal 2023, and 10-11% in fiscal 2024.

Adobe’s digital media segment, which accounted for 73% of fiscal 2023 revenue, continues to grow at a steady pace, retaining media professionals as subscribers. But the enterprise digital experiences segment, which accounts for 25% of revenue, has faced more macro headwinds over the past year. Currency headwinds also reduced reported sales growth by 3 percentage points for the full year.

Adobe’s slowing growth has disappointed investors who had been hoping for new generative AI tools that could be used to create AI images, photos, 3D models and accelerate other enterprise tasks.

Adobe’s operating margins are still rising, with adjusted EPS growing 17% in fiscal 2023, but the company expects to grow only 10% to 12% in fiscal 2024. It also recently warned that there could be “significant financial costs” in resolving the Federal Trade Commission. The Federal Trade Commission (FTC) is investigating its subscription cancellation policies, and its $20 billion Figma acquisition remains stymied by antitrust concerns. Adobe’s fiscal 2024 EPS outlook does not take into account either of these unpredictable factors.

This combination of slowing growth and regulatory headwinds surprised bulls who rushed to Adobe in a buying frenzy for AI stocks. Even after post-earnings declines, it still doesn’t look cheap at 33x up-front earnings.

Salesforce prioritizes profits over revenue growth.

Salesforce’s revenue grew at a CAGR of 26% from fiscal 2017 to fiscal 2022 (ending January 31, 2022). However, sales in fiscal 2023 only increased by 18%, and in fiscal 2024, sales are expected to grow by only 11%.

Salesforce faces many of the same challenges as Adobe. Macro headwinds made it difficult to lock in large customers on long-term contracts, while currency headwinds reduced reported revenue by 4 percentage points in fiscal 2023.

Salesforce has also been expanding its AI ecosystem to analyze customer data more efficiently and accelerate certain tasks. But these new services aren’t yet evolving on their own, and Salesforce still faces stiff competition. microsoft, trustand other technology giants in the CRM market.

Over the past year, steady growth in the Salesforce platform and other businesses (including Lightning and Slack) and accelerated growth in data clouds (including Mulesoft and Tableau) have offset slower growth in sales cloud, services cloud, and marketing. & Commerce Cloud Business. However, these three weaker businesses, which accounted for 65% of sales in the first nine months of fiscal 2024, may recover as the macro environment improves.

Activist investors had Salesforce under siege throughout the first half of 2023, but backed off after it laid off 10% of its workforce and curbed spending, significantly boosting operating margins and profits. Adjusted EPS grew only 10% in fiscal 2023, but growth is expected to accelerate by 56% in fiscal 2024.

Salesforce’s stock looks cheap at 29 times next year’s earnings, but bears warn that prioritizing profitability over revenue growth could narrow its competitive moat in the crowded cloud software market.

Better Buy: Salesforce

I’m not a big fan of either stock at the moment because I can easily spot the flaws. But if I had to choose between the two, I would choose Salesforce. Earnings growth is accelerating, stocks are cheaper, and it doesn’t face regulatory issues.