MSFT vs. ADBE - Buy, Hold, or Sell in March Driven by digitization and ongoing technical advancements, the software industry is poised for substantial expansion. In light of this, is it wise to invest in software stocks Microsoft Corporation (MSFT)...
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Driven by digitization and ongoing technical advancements, the software industry is poised for substantial expansion. In light of this, is it wise to invest in software stocks Microsoft Corporation (MSFT) and Adobe Inc. (ADBE) this month? Let's explore.
The software industry is poised for significant expansion as enterprises increasingly rely on software solutions. Technological progress is bolstering the sector, fostering innovation, refining development processes, and facilitating immersive, interconnected experiences.
With a favorable long-term perspective, investing in shares of Adobe Inc. (ADBE) appears prudent. Similarly, monitoring Microsoft Corporation (MSFT) in anticipation of solid returns could prove advantageous. Before delving into these highlighted stocks, let's analyze industry dynamics.
Recent years have witnessed substantial transformative shifts in the software industry propelled by emerging technology trends. Edge computing, low-code development, and cybersecurity spearhead a revolution, fundamentally altering the landscape of software development, deployment, and utilization.
Artificial Intelligence (AI) and Machine Learning (ML) have transcended the realm of mere buzzwords, solidifying their status as indispensable components within software applications. These algorithms play pivotal roles in predictive analytics, personalization, automation, and augmenting user experiences and decision-making processes.
Furthermore, the industry stands to reap substantial benefits as cloud-native technologies progress, emphasizing agility and streamlining IT management. The evolution is resulting in decreased complexity, heightened scalability, and enhanced cost-effectiveness, granting organizations superior performance and flexibility in their software operations.
Global spending on public cloud services is projected to soar by 20.4% this year, propelled by a blend of price increases from cloud vendors and increased utilization, mirroring the trends witnessed in 2023.
Moreover, Gartner (IT) predicts a 12.7% yearly increase in global software spending, poised to reach $1.03 trillion by 2024, surpassing the 6.8% growth in total IT expenditure anticipated to reach $5 trillion. This underscores the pivotal role of software in propelling and magnifying technological advancements across the industry.
Simultaneously, Statista forecasts that revenue in the software market will achieve $698.80 billion by 2024. Additionally, according to a report by Grand View Research, the global application development software market is expected to expand at a CAGR of 24.3%, reaching $733.50 billion by 2028.
Against this backdrop, MSFT and ADBE are strategically positioned to capitalize on the industry's favorable conditions.
In terms of price performance, MSFT has climbed 10.9% over the past three months, while ADBE plunged 6.7% during the same period. However, MSFT climbed 22.6% over the past nine months, closing the last trading session at $409.14, whereas ADBE surged 28.5% during the same period, closing the last trading session at $556.04.
But which software stock could be a better pick? Let's find out.
Latest Developments
On January 15, MSFT and Vodafone unveiled a 10-year strategic alliance aimed at bolstering digital infrastructure across Europe and Africa. Vodafone is committing $1.5 billion to co-create cloud and AI solutions with MSFT, enhancing services for over 300 million users.
MSFT will gain access to Vodafone's connectivity services, enriching its ecosystem. Moreover, the company is planning to invest in Vodafone's IoT platform, which is poised to emerge as a standalone venture by April 2024. The move should attract fresh partnerships and clientele, fueling application development and extending connectivity to diverse devices.
The collaboration promises MSFT exponential growth by fortifying its market presence and advancing technological innovation.
On March 7, ADBE launched the Adobe Express mobile app beta for Android and iOS, featuring revolutionary Adobe Firefly generative AI and enhanced mobile editing functionalities. Leveraging ADBE's renowned imaging, video, and design expertise, the app will enable the swift transformation of creative concepts into compelling content while on the move.
The release underscores ADBE's commitment to innovation, empowering individuals to craft standout content effortlessly, thereby strengthening its position as a leader in digital creativity solutions.
Recent Financial Results
In the second quarter of fiscal 2024, which ended December 31, 2023, MSFT's total revenue increased 17.6% year-over-year to $62.02 billion. Its operating income rose 32.5% from the year-ago value to $27.03 billion.
However, the company's cash outflow from investing activities grew 905.9% from the prior year's period to $71.93 billion. As of December 31, 2023, MSFT's cash and cash equivalents amounted to $17.31 billion, down from $34.70 billion as of June 30, 2023.
During the fourth quarter of fiscal 2023, which ended December 1, 2023, ADBE's total revenue increased 11.6% year-over-year to $5.05 billion. Its operating income rose 15.8% from the year-ago value to $1.74 billion.
Moreover, the company's cash inflow from investing activities came in at $153 million, compared to a cash outflow of $69 million in the previous year's quarter. As of December 1, 2023, ADBE's cash and cash equivalents stood at $7.14 billion, up from $4.23 billion as of December 2, 2022.
Past and Expected Financial Performance
Over the past three years, MSFT's revenue and EBITDA increased at a CAGR of 14.1% and 18.1%, respectively. Its net income and EPS grew at respective CAGRs of 17.2% and 18.1% over the period. Moreover, the company's total assets rose at a CAGR of 15.7% over the same time frame.
For the fiscal year ending June 2024, analysts expect the company's revenue to increase 15.3% year-over-year to $244.38 billion. Likewise, its EPS for the ongoing year is expected to grow 19.3% from the previous year to $11.70.
Over the past three years, ADBE's revenue and EBITDA rose at a CAGR of 14.7% and 14.8%, respectively. In addition, the company's net income and EPS increased at respective CAGRs of 1.1% and 3%. Furthermore, its total assets grew at a CAGR of 7% during the same period.
The consensus revenue estimate of $21.50 billion for the fiscal year ending November 2024 reflects a 10.8% year-over-year increase. Additionally, the company's EPS for the same period is expected to grow 11.5% from the prior year to $17.92.
Profitability
MSFT's trailing-12-month revenue is 11.7 times that of what ADBE generates. However, ADBE is more profitable, with a trailing-12-month gross profit margin of 87.87% compared to MSFT's 69.81%. Similarly, ADBE's trailing-12-month levered FCF margin of 34.06% compares with MSFT's 25.78%. Additionally, ADBE's trailing-12-month ROTC of 21.16% compares with MSFT's 20.77%.
Valuation
In terms of trailing-12-month non-GAAP P/E, ADBE is trading at 33.77x, 7.1% lower than MSFT's 36.36x. Moreover, ADBE's trailing-12-month Price/Sales of 12.79x is 2.7% lower than MSFT's 13.14x. Furthermore, ADBE's trailing-12-month EV/Sales of 12.47x compare with MSFT's 13.27xx.
Thus, ADBE is more affordable.
POWR Ratings
MSFT has an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. Conversely, ADBE has an overall rating of B, which translates to Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. MSFT has a D grade for Value, corresponding to its higher-than-industry valuation. In terms of forward Price/Sales and forward non-GAAP PEG, the stock is trading at 12.22x and 2.28x, 313.5% and 12.4% higher than the industry averages of 2.96x and 2.03x, respectively.
On the other hand, ADBE has a C grade for Value, which is in sync with its comparatively lower valuation. In terms of forward Price/Sales, the stock is trading at 11.43x, 286.8% higher than the industry average of 2.96x. However, its forward non-GAAP PEG of 1.93x is 4.9% lower than the 2.03x industry average.
Of the 44 stocks in the B-rated Software - Business industry, MSFT is ranked #18. Whereas, in the B-rated Software - Application industry, ADBE is ranked #28 out of 132 stocks.
Beyond what we've stated above, we have also rated both stocks for Growth, Momentum, Stability, Sentiment, and Quality. Click here to view MSFT's ratings. Get all ADBE ratings here.
The Winner
While both MSFT and ADBE emerge as key players positioned to leverage the software industry's dynamics, ADBE's discounted valuation and better financial performance in its most recent quarter could position it as a better investment option at this juncture.
Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy. You can view all the top-rated stocks in the Software - Business industry here. Click here to view all the top-rated stocks in the Software - Application industry.
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MSFT shares were unchanged in premarket trading Friday. Year-to-date, MSFT has gained 9.00%, versus a 8.31% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program.She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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