Adobe's stock advanced nearly 20% this year as its Creative Cloud services, marketing services, and analytics tools locked in mainstream and enterprise customers. Salesforce's stock rose nearly 10% as its market-leading customer relationship management (CRM) tools faced only limited disruptions from COVID-19.
Both companies are well-insulated from the current macro headwinds, but is either stock worth buying at these elevated levels? Let's dig deeper to find out.
The differences between Adobe and Salesforce
Adobe generated 70% of its revenue from its Digital Media segment, which houses its Creative and Document cloud products, last quarter. The Creative Cloud -- which includes over 20 apps for photography, video, and web design -- generated 87% of the segment's annualized recurring revenue at the end of the quarter.
The rest of Adobe's revenue mainly came from its Digital Experience business, which hosts enterprise-facing analytics, marketing, and e-commerce tools. It's been expanding that ecosystem with its acquisition of e-commerce services provider Magento and enterprise deals with Microsoft (NASDAQ:MSFT) and ServiceNow (NYSE:NOW).
Salesforce is the world's largest CRM company. Its subscription and support revenue accounted for 94% of its top line last quarter, while the rest came from professional services and other businesses.
Salesforce splits its business into four main segments: the Salesforce CRM Platform and other services (29% of its revenue last quarter), the Sales Cloud (25%), Service Cloud (25%), and Marketing & Commerce Clouds (14%). Salesforce bundles these tools into its core CRM platform to widen its moat against rivals like SAP (NYSE:SAP), Microsoft, and Adobe.
Which company is growing faster?
Adobe's revenue and adjusted earnings rose 24% and 16%, respectively, in fiscal 2019 (which ended last November). In the first quarter, which ended on Feb. 28, Adobe's revenue rose 19% annually as its adjusted earnings grew 33%.
Adobe's Digital Media and Digital Experience revenue grew 22% and 15% annually, respectively, even though the former faced some softness in China and the latter dealt with some "slippage" in deals near the end of the quarter. Adobe noted the impact to its revenue growth wasn't severe, but COVID-19 still reduced its adjusted EPS by $0.07 due to the cancellation of its corporate events (including Adobe Summit).
Adobe expects its revenue and earnings to rise by 16% and 28% annually, respectively, in the second quarter. Wall Street expects its revenue to rise 16% this year with 24% earnings growth -- which suggests the pandemic will only marginally impact its core business.
Salesforce's revenue and adjusted earnings rose 26% and 79%, respectively, in fiscal 2020 (which ended on Jan. 31). Subscription and support revenue grew by the double-digits across all four of its core businesses, led by the 57% growth of its Salesforce Platform and other services segment. Its acquisition of Tableau, which closed last August, also boosted its revenue and earnings.
Salesforce claims COVID-19 mainly disrupted its airline, hospitality, and Chinese customers -- but its gains in other markets, which shifted toward cloud-based CRM solutions as brick-and-mortar stores closed down, easily offset those declines.
For the first quarter, Salesforce expects its revenue to rise 30%-31% annually, but for its earnings to dip 24%-25%. But excluding a $0.27 boost from investments a year earlier, its earnings could grow 6%-8%. For the full year, Salesforce expects its revenue to rise 23%-24% and for its adjusted earnings to grow 6%.
Which stock is cheaper relative to its growth?
Investors are currently paying premiums for Adobe and Salesforce. As of this writing, Adobe trades at 39 times forward earnings, while Salesforce has a forward P/E of 56. Adobe generates stronger earnings growth than Salesforce, is consistently profitable by GAAP measures, and regularly repurchases its shares with its excess cash flow. Salesforce isn't consistently profitable by GAAP measures and usually doesn't buy back any shares.
Adobe's Digital Media segment also doesn't face much direct competition and reduces its overall dependence on the more macro-sensitive Digital Experience business. Salesforce arguably faces more direct competition in the CRM market, and the recent resignation of co-CEO Keith Block -- who told investors COVID-19 was "not affecting" its business last quarter -- raises some concerns about its future leadership.
The winner: Adobe
Adobe and Salesforce are both still great long-term investments. But if I had to choose one over the other, I'd pick Adobe for its lower valuation, stable profits, and better-diversified business. Investors interested in Salesforce should wait for the stock to cool off a bit before pulling the trigger.