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Better Buy: Adobe vs. Microsoft

By Robert Izquierdo – Sep 22, 2020 at 10:56AM

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Both tech companies are experiencing a strong year. Is one a better investment? Discover which has the edge.

Veteran tech icons Adobe (ADBE 5.55%) and Microsoft (MSFT 6.16%) are enjoying renewed investor interest this year despite a global pandemic. Both sported record-high share prices in 2020 despite being decades-old veteran technology sector companies.

Adobe and Microsoft prove significant stock gains are not just the purview of younger tech companies such as and Facebook. But is one a better investment option now? Let's take a closer look at each to find out.

Adobe's achievements

Adobe is enjoying a banner year. It's among the companies benefiting from increased demand for digital products and services created by pandemic-induced shelter-at-home practices.

A cloud of digital icons floating in air with a hand pressing a bullseye in the center.

Image source: Getty Images.

For example, the company's Adobe Sign e-signature product grew enterprise bookings by 200% year-over-year in its fiscal third quarter (which ended Aug. 28). Fewer people can sign documents in person amid a pandemic, leading to Adobe Sign's substantial growth.

That's just one of Adobe's many digital products servicing sectors from schools to businesses, which are all embracing digital solutions at unprecedented levels. According to renowned consultancy McKinsey & Company, society's digital adoption rate in the initial eight weeks of government lockdowns would have normally taken five years to achieve.

It's no surprise Adobe announced record-setting Q3 earnings. The company's $3.23 billion in sales represented a 14% jump from last year, and the highest Q3 revenue in history.

What might happen post-pandemic? Adobe may not see the levels of growth it experienced this year, but its success was a trend long before the pandemic's impact accelerated digital adoption. The company's strong revenue growth has existed for years. It achieved record-setting revenue in 2018 and 2019, with 24% year-over-year growth in both years.

ADBE Revenue (Annual) Chart

ADBE Revenue (Annual) data by YCharts.

Adobe owes its prosperity to a transformation of its business approach, going from selling software licenses to a software-as-a-service (SaaS) subscription model. Instead of one-time sales, Adobe now collects recurring revenue. If consumers and businesses want to keep accessing Adobe products, they must pay monthly fees.

Adobe's success will continue for years. Forecasts estimate global spending on digital transformation to reach $1.3 trillion in 2020, and to nearly double to $2.3 trillion by 2023. That growth translates to increased sales for Adobe.

Microsoft's success

Like Adobe, Microsoft captured renewed revenue growth through a SaaS model. Its widely-used Office software is now a subscription service called Microsoft 365 (formerly Office 365). This division's revenue from commercial sales rose 19% year-over-year in Microsoft's fiscal fourth quarter (which ended June 30).

The company is also benefiting from businesses increasingly outsourcing IT infrastructure to third parties (including Microsoft) through cloud computing. Microsoft's cloud computing offering, Azure, witnessed a 47% year-over-year increase in Q4 revenue.

Cloud computing and SaaS have propelled Microsoft's revenue growth for the past several years. This combination helped Microsoft achieve a 14% year-over-year revenue increase in its 2020 fiscal year.

MSFT Revenue (Annual) Chart

MSFT Revenue (Annual) data by YCharts.

The company is also benefiting from consumers turning to video games as a key entertainment vehicle this year. The combination of shelter-at-home behavior and the cancellation of sporting events, concerts, and other public entertainment options resulted in consumers embracing video games as an alternative.

As a result, Microsoft's Xbox gaming division is experiencing a 65% year-over-year revenue jump in Q4. Contrast this against Xbox's 11% year-over-year revenue decline in the company's fiscal second quarter (which ended Dec. 31).

The Q2 decline despite holiday sales was due to gamers postponing purchases in anticipation of Microsoft's next-generation Xbox gaming console, but the pandemic shifted consumer behavior. Now, with the release of this next-gen Xbox arriving on Nov. 10, Microsoft is poised to reap substantial revenue growth in the division this year.

The final verdict

Investing in either of these tech stocks is worthwhile. Both will continue to see revenue growth as consumers, businesses, and the public sector expand the use of digital solutions.

But if you had to choose just one, which is the better option? Microsoft wins this contest.

Microsoft's Windows and Office products are already in wide use. Its cloud services are second only to Amazon's in terms of market share. In Microsoft, you've got a player with an ecosystem of entrenched business products that competitors are hard-pressed to unseat.

Its upcoming Xbox console release brings another revenue boost. Add to this combination Microsoft's dividend, and investors have an additional bonus. Adobe doesn't offer a dividend, and Microsoft just raised its dividend on Sept. 15.

These factors give Microsoft the edge as the better investment choice.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Robert Izquierdo has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Adobe Systems, Amazon, Facebook, Microsoft, and and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, short January 2022 $1940 calls on Amazon, and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Microsoft Stock Quote
$255.14 (6.16%) $14.81
Adobe Stock Quote
$344.93 (5.55%) $18.15

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