Better Buy: Salesforce vs. SAP With the increasing adoption of advanced software in almost every industry as part of their digital transformation efforts, prominent software companies SAP (SAP) and Salesforce, Inc. (CRM) should witness rising...
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With the increasing adoption of advanced software in almost every industry as part of their digital transformation efforts, prominent software companies SAP (SAP) and Salesforce, Inc. (CRM) should witness rising demand for their solutions. But which of the two stocks is a better buy now? Read on to find out.
SAP SE (SAP) in Walldorf, Germany, operates as an enterprise application software company worldwide. The company operates through three segments: Applications, Technology & Support; Qualtrics; and Services. Its offerings include SAP S/4HANA, SAP Intelligent Asset Management, and SAP SuccessFactors Human Experience Management Suite. In comparison, Salesforce, Inc. (CRM) in San Francisco, develops enterprise cloud computing solutions focused on customer relationship management. The company offers Sales Cloud to store data, monitor leads and progress, and forecast opportunities.
The growing concerns over the Fed's aggressive monetary policy tightening to control soaring inflation without triggering an economic recession have led to a massive tech sell-off of late, affecting software companies.
However, the continuation of hybrid working, and ongoing the digital transformation, should help the software industry rebound soon. Furthermore, the growing demand for advanced software products and services in almost every sector should support the software industry's growth in the coming months. According to Gartner, Software spending is expected to grow 9.8% to $674.9 billion in 2022. Therefore, both SAP and CRM should benefit.
But which of these two stocks is a better buy now? Let's find out.
Latest Developments
On Jan. 18, 2022, SAP and Accenture (ACN) introduced a new joint offering to help large enterprises move to the cloud and deliver continuous innovation. This could lead to increasing demand for its solutions.
On April 27, 2022, CRM announced innovations in Salesforce Flow, the complete suite of automation technologies, to help customers quickly automate any complex business process on the Salesforce Customer 360 Platform. This could lead to increasing demand for its solutions.
Recent Financial Results
SAP's total revenue increased 20% year-over-year to €7.07 billion ($7.58 billion) for the fiscal first quarter, ended March 31, 2022. The company's operating profit grew 31% year-over-year to €2.82 billion ($3.02 billion), while its operating profit came in at €1.05 billion ($1.13 billion), representing a 24% year-over-year increase.
CRM's revenue increased 27% year-over-year to $7.33 billion for its fiscal fourth quarter, ended Jan. 31, 2022. However, its net loss came in at $28 million compared to $267 million in the prior-year quarter. Also, its loss per share was $0.03 compared to EPS of $0.28 in the year-ago period.
Past and Expected Financial Performance
SAP's net income and EPS have grown at CAGRs of 15% and 15.5%, respectively, over the past three years. Analysts expect SAP's revenue to increase 3.7% in the current year and 7.3% next year. The company's EPS is expected to decline 27.3% in the current year but grow 13.2% next year. Furthermore, its EPS is expected to grow at 1.4% per annum over the next five years.
In comparison, CRM's net income and EPS have grown at CAGRs of 25.8% and 13.4%, respectively, over the past three years. The company's revenue is expected to increase 21% in the current year and 18% next year. Its EPS is expected to decline 2.7% in the current year but grow 23.9% next year. Also, CRM's EPS is expected to grow 15.1% per annum over the next five years.
Profitability
SAP's trailing-12-month revenue is 1.19 times what CRM generates. SAP is also relatively more profitable, with EBITDA and net income margins of 22.51% and 17.35%, respectively, compared to CRM's 11.57% and 5.45%.
Furthermore, SAP's 2.75%, 4.63%, and 5.93% respective ROE, ROA, and ROTC1 are higher than CRM's 2.90%, 0.47%, and 0.62%.
Valuation
In terms of forward non-GAAP P/E, CRM is currently trading at 34.27x, which is 94.9% higher than SAP's 17.58x. And CRM's 19.83x forward EV/EBITDA ratio is 70.9% higher than SAP's 11.60x.
So, SAP is relatively affordable here.
POWR Ratings
SAP has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. In contrast, CRM has an overall C rating, which translates to Neutral. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.
SAP has a B grade for Value, which is consistent with its 13.86x forward EV/EBIT, which is 10.9% lower than the 15.56x industry average. However, CRM has a C grade for Value, which is in sync with its 24.90x forward EV/EBIT, which is 60.1% higher than the 15.56x industry average.
Furthermore, SAP has a B grade for Quality. This is justified given SAP's 18.54% trailing-12-month EBIT margin, which is 125.7% higher than the 8.22% industry average. In comparison, CRM has a Quality grade of C, which is in sync with its 2.27% trailing-12-month EBIT margin, which is 72.3% lower than the 8.22% industry average.
Among the 157 stocks in the Software - Application industry, SAP is ranked #20. In comparison, CRM is ranked #40.
Beyond what I have stated above, we have also rated the stocks for Growth, Sentiment, Stability, and Momentum. Click here to view all the SAP ratings. Also, get all the CRM ratings here.
Click here to check out our Software Industry Report for 2022
The Winner
With rising demand for advanced software solutions, the industry should witness solid growth this year and beyond. While both SAP and CRM are expected to gain, we think it is better to bet on SAP now because of its lower valuation, higher profitability, and robust financials.
Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Software - Application industry here.
CRM shares were trading at $163.83 per share on Friday afternoon, up $1.37 (+0.84%). Year-to-date, CRM has declined -35.53%, versus a -12.86% rise in the benchmark S&P 500 index during the same period.
About the Author: Nimesh Jaiswal
Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock's price is the key approach that he follows while advising investors in his articles.
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