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Salesforce vs. Adobe: Which Is a Better Digital Transformation Investment?

By Nicholas Rossolillo - Feb 21, 2020 at 8:50AM

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It’s shaping up to be an epic battle, but investors don’t need to worry about picking just one.

Jim Cramer -- the energetic host of CNBC's Mad Money -- thinks that competition between (CRM -3.91%) and Adobe (ADBE -2.87%) could "become one of the great rivalries in tech." Really? Customer relationship management software versus digital design and creativity software?  

The thing is, I agree. But I would suggest his timeline is off. It's already one of the great tech rivalries out there.

Unbeknownst to the general public, digital transformation has been sweeping the globe and reshaping how organizations think about their operations and how to present themselves to customers. Salesforce and Adobe, while born of different disciplines, are some of the preeminent players in that digital transformation. Rather than choose one, though, I say own both.

A laptop, smartphone, and cup of coffee sitting on a table in front of a window overlooking a sunrise.

Image source: Getty Images.

Data versus content creation

First, though, it's worth acknowledging the two very different histories of these two companies. Adobe, the senior of the two by nearly two decades, started on the content creation side of the software business. It was instrumental in the development of computer-based publishing, a fact still evident in its current suite of software that leans toward web content creation and other creativity products. Salesforce, as its name implies, started out building cloud-based software to manage customer relationships.

What changed that these two unrelated software developers are now competitors? According to Avionos CEO Scott Webb, an independent partner of both Salesforce and Adobe, the change really came a few years ago when organizations started looking for software partners that knew how to deliver experiences to customers. Webb told me:

This isn't a blip, but a fundamental change in how software is viewed and valued within an organization. They started from different points, but because they are driving experiences it was only a matter of time before they started to overlap. Salesforce started with data and customer information, Adobe started with content and the value of the content to put in front of the customer. They were inevitably on a collision course since data and content is really both about the customer experience.

It's interesting that changes in consumer behavior, the rise of cloud computing (which Salesforce has been a champion of since Day One), and other advancing technologies have pitted these seemingly unrelated businesses into the same realm over the last few years. But there are similarities that go beyond just the headline numbers -- both have been growing revenues at a similar pace the last few years and carry similar market caps. Even their acquisition strategy has overlapped. Data science, digital content creation, web marketing, and e-commerce management are especially notable mentions. As to the latter industry, Salesforce got into the space with its $2.8 billion takeover of Demandware in 2016 to jump-start its "marketing and commerce cloud," with Adobe upping its game in the same department with Magento ($1.7 billion) and Marketo ($4.8 billion) in 2018. Both remain active on the acquisition trail, though Salesforce has been in an especially spend-happy mood as of late.

In short, outside of a few core competencies, everything else related to customer experience and organizational digital transformation is a slugfest between these two.

Parallel paths to growth don't mean a collision course

Which stock is the better buy? I'm a proponent of owning both (although I've owned Salesforce for a number of years but still haven't pulled the trigger on Adobe ... yet). The massive digital transformation industry (estimated at over $1 trillion a year in global spending) is a growing by double-digit percentages and both companies are benefitting from it. According to Webb, budgeting for productivity and efficiency tools (think Microsoft Office) is increasingly headed toward higher-order software platforms like digital transformation and customer experience. Put another way, Webb said, "a lot of [other] budget [items] would need to be trimmed before either [Adobe or Salesforce] get hit because they're so central to their customers' success."  

As I mentioned before, that growing pie is equating to similar upside, with revenue at Adobe growing 24% in its fiscal 2019 year and Salesforce growing 27% through the first three quarters of its 2019. Adobe wins in the operating profit margin department -- much of that due to Salesforce's heavy spending on acquisitions. But both stocks currently trade for about 47 times trailing 12-month free cash flow.

Thus, as the digital transformation movement heats up in the years ahead, it's these two software giants that all eyes should be on. Rather than pick a winner, though, I think investors would be best served owning both for now.

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