The software industry is experiencing substantial growth due to the growing demand for AI and the expansion of the software application sector. The industry’s growth is driven by technological advancements and the need for businesses to stay competitive in today’s digital age.
The demand for software applications has increased due to significant investments in digitalization across various industries. Gartner expects worldwide software spending to rise 13.9% year-over-year to $1.04 trillion in 2024.
The worldwide application development software market is expected to reach $234.70 billion by 2028, growing at a 6.9% CAGR. It is also expected to generate $179.90 billion in revenue in 2024. The market for application development software is likely to expand due to the rising need for scalable and customized software applications.
Given this backdrop, let’s compare two Software - Application stocks, Adobe Inc. (ADBE) and Salesforce, Inc. (CRM), to understand why CRM will be a better buy than ADBE.
The Case for Adobe Inc. Stock
Adobe Inc. (ADBE) provides various products and services to professionals, communicators, businesses, and consumers to create, manage, deliver, measure, optimize, engage with, and transact with content and experiences across diverse digital media formats. Its segments include Digital Media, Digital Experience, and Publishing and Advertising.
On April 9, 2024, ADBE unveiled the all-new Frame.io V4, a versatile, quick, and intuitive creative collaboration platform that optimizes and simplifies content development and production workflows. As teams and organizations rush to satisfy the growing demand for video content, creatives and stakeholders at all stages of creation are delayed by disconnected tools and systems.
Frame.io V4 addresses these challenges by providing a centralized hub for collaboration, feedback, and approval processes, ultimately saving time and increasing efficiency in the creative process.
ADBE’s stock has gained 25.3% over the past year to close the last trading session at $473.07. However, the stock has declined 24.9% over the past three months.
ADBE’s revenue grew at a CAGR of 13.4% over the past three years. On the other hand, its net income shrank at a CAGR of 4.8% over the past three years.
In terms of forward EV/Sales, ADBE is trading at 9.75x, 246.9% higher than the industry average of 2.81x. Likewise, its forward EV/EBIT is trading at 21.18x, 8.5% higher than the 19.50x industry average. Also, its forward EV/EBITDA is trading at 19.69x, 34.5% higher than the 14.50x industry average.
On the other hand, its forward non-GAAP PEG of 1.59% is 17% lower than the 1.91x industry average.
In terms of the trailing-12-month net income margin, ADBE’s 24.08% is 807.2% higher than the 2.65% industry average. Likewise, its 34.97% trailing-12-month EBIT margin is 616.4% higher than the industry average of 4.88%. Additionally, its 33.76% trailing-12-month levered FCF margin is 254.8% higher than the industry average of 9.52%.
For the fiscal first quarter, which ended March 1, 2024, ADBE’s total revenue increased 11.2% year-over-year to $5.18 billion. Its gross profit rose 12.2% from the year-ago value to $4.59 billion. Moreover, the company’s non-GAAP net income and non-GAAP net income per share grew 17.1% and 17.9% year-over-year to $2.05 billion and $4.48, respectively.
Street expects ADBE’s revenue and EPS for the quarter ended May 30, 2024, to increase 9.9% and 12.3% year-over-year to $5.29 billion and $4.39, respectively. The company surpassed the consensus EPS estimates in each of the trailing four quarters.
ADBE’s POWR Ratings reflect this promising outlook. It has an overall rating of B, translating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Quality and a B for Sentiment. Within the Software - Application industry, it is ranked #33 out of 134 stocks. To see the additional grades of ADBE for Growth, Value, Momentum, and Stability, click here.
The Case for Salesforce, Inc. Stock
Salesforce, Inc. (CRM) is a cloud-based software company. It provides Customer Relationship Management (CRM) technology that brings companies and customers together worldwide. The company’s service includes sales to store data, monitor leads and processes, forecast opportunities, gain insights through analytics and relationship intelligence, and service that enables companies to deliver trusted and highly personalized customer service and support at scale.
CRM’s stock has gained 40.3% over the past six months and 39% over the past year to close the last trading session at $275.74.
CRM’s revenue grew at a CAGR of 17.9% over the past three years. Also, its total Assets grew at a CAGR of 14.6% during the same period.
In terms of forward non-GAAP P/E, CRM is trading at 28.15x, 17.9% higher than the industry average of 23.87x. Likewise, its forward EV/EBIT is trading at 21.62x, 10.7% higher than the 19.52x industry average. Also, its forward EV/EBITDA is trading at 18.62x, 28.4% higher than the 14.50x industry average. On the other hand, its 1.32x forward non-GAAP PEG is 30.9% lower than the 1.91x industry average.
In terms of the trailing-12-month net income margin, CRM’s 11.87% is 347% higher than the 2.65% industry average. Likewise, its 7.01% trailing-12-month Return on Common Equity is 110.7% higher than the 3.33% industry average. Also, its 17.21% trailing-12-month EBIT margin is 252.6% higher than the 4.88% industry average.
CRM’s total revenue during the fourth quarter that ended January 31, 2024, came in at $9.29 billion, an increase of 10.8% year over year. Its gross profit improved 13.6% from the year-ago quarter to $7.14 billion.
Moreover, the company’s net income and EPS came in at $2.25 billion and $2.29, up 35.9% and 36.3% from the prior-year quarter, respectively. CRM’s free cash flow improved 26.7% year over year to $3.26 billion.
Analysts expect CRM’s EPS and revenue for the quarter ended April 30, 2024, to increase 40.2% and 10.9% year-over-year to $2.37 and $9.15 billion, respectively. The company surpassed the consensus EPS and revenue estimates in each of the trailing four quarters.
CRM’s POWR Ratings reflect its bright prospects. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has a B grade for Growth, Sentiment, and Quality. Within the same industry, it is ranked #14. Beyond what we stated above, we also have given CRM grades for Value, Momentum, and Stability. Get all the CRM ratings here.
Adobe (ADBE) vs. Salesforce (CRM) - Buy, Hold, or Sell in May?
The application software industry is rapidly evolving. Generative AI and cloud-native technologies are increasing flexibility, scalability, and cost-efficiency while expanding beyond IT to meet user demands.
Companies like ADBE and CRM, at the forefront of technology innovation, have seen significant growth in recent years due to their focus on developing cutting-edge software solutions for businesses across various industries. Their ability to adapt to changing market trends and customer needs has solidified their positions as industry leaders in the tech sector.
ADBE and CRM look well-positioned to capitalize on the industry’s promising prospects. Although both have solid fundamentals, favorable analyst estimates, and robust profitability, CRM is a better choice than ADBE due to its historical growth metrics.
Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy. View all the top-rated stocks in the Software – Application industry here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
CRM shares were trading at $272.56 per share on Tuesday morning, down $3.18 (-1.15%). Year-to-date, CRM has gained 3.72%, versus a 6.99% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.
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