Slack's enterprise communication platform reduced the need for clumsy email chains and time-consuming phone calls. It also recently expanded its platform with Slack Connect, which allows companies to communicate and collaborate securely with external partners.
Adobe transformed its desktop software into cloud-based services that locked in customers with subscriptions and eliminated the need for local software installations and periodic upgrades. Adobe also expanded its cloud ecosystem with additional services for enterprise customers.
Slack went public via a direct listing in June 2019. But after a few wild swings, its stock is still hovering near its initial reference price of $26. Meanwhile, Adobe's stock has surged nearly 60% just since Slack's public debut. Let's see why Adobe outperformed Slack, and if it will remain the faster-growing stock for the foreseeable future.
Slack: A first mover with a shrinking moat
Slack operates a "freemium" business model. Paying businesses gain unlimited messages and integrated tools, better security, more cloud storage, automation services for repetitive tasks, and other services.
Slack was founded seven years ago, and it enjoys a first mover's advantage in its disruptive niche. However, Microsoft's (NASDAQ:MSFT) Teams, which was launched in 2017, copied many of Slack's features and was subsequently bundled into Office 365 subscriptions as a free service.
In response, Slack filed an antitrust complaint against Microsoft in Europe earlier this year, alleging the tech giant was "force installing" a "weak, copycat product" onto "millions" of users. Slack continued to grow as Microsoft expanded Teams, but that competitive threat cast a long shadow over the underdog's future.
Adobe: An evolving tech giant with an expanding ecosystem
Adobe splits its business into two main divisions: the Digital Media unit, which provides its creativity and productivity software as cloud-based services; and the Digital Experience unit, which hosts its enterprise tools.
The Digital Media unit's Creative Cloud hosts industry-standard software like Adobe Photoshop, Premiere Pro, Illustrator, After Effects, and Acrobat. Most of these software products dominate their respective markets.
The Digital Experience unit, which hosts cloud-based advertising, analytics, advertising, and e-commerce tools, faces much tougher competition. salesforce.com (NYSE:CRM) competes against most of Adobe's enterprise-oriented services, while Shopify competes against Adobe's Magento e-commerce services.
Which company is growing faster?
Slack's revenue grew 57% year over year to $630 million in fiscal 2020, which ended on Jan. 30. Its GAAP net loss widened from $141 million to $571 million last year, but its non-GAAP net loss narrowed slightly from $116 million to $113 million.
In the first half of fiscal 2021, Slack's revenue rose 49% year over year to $417.5 million, fueled by a shift to remote work during the coronavirus pandemic. Its number of paid customers rose 30% year over year to 131,000 in the second quarter, with an impressive net retention rate of 125%.
Slack's GAAP net loss narrowed year over year from $393 million to $150 million in the first half of the year, while its non-GAAP net loss narrowed significantly from $80 million to $16 million. It expects its revenue to rise 38%-39% for the full year with a narrower net loss than 2020.
Those numbers all indicate Microsoft isn't crushing Slack, but investors still seem skeptical about its long-term prospects against the tech giant.
Adobe's revenue rose 24% year over year to $11.17 billion in fiscal 2019 (which ended last November), and its non-GAAP net income rose 15%. Its GAAP net income grew 14% to $2.95 billion.
In the first nine months of 2020, Adobe's revenue rose 15% year over year to $9.44 billion. Its Digital Media unit remained stable throughout the pandemic as it locked in its subscribers, but its Digital Experience unit struggled as the pandemic throttled its advertising cloud revenue.
But on the bottom line, Adobe's non-GAAP net income rose 29% year over year to $3.55 billion as it reined in its spending throughout the pandemic. For the full year, it expects its revenue to rise 15%, and for its non-GAAP EPS to grow 30%.
Adobe already repurchased 6.5 million shares in the first three quarters of 2020 (about 1% of its float), and it plans to continue buying back shares throughout the ongoing pandemic -- even as many other companies suspend their buybacks to conserve cash.
The valuations and verdict
Slack is difficult to value because it isn't profitable yet. But it currently trades at about 13 times next year's sales, which is a fairly low price-to-sales ratio for a company with nearly 40% annual revenue growth.
Adobe trades at 44 times forward earnings and 15 times next year's sales. Those valuations are also reasonable relative to those of many of its cloud-based peers. For example, Salesforce trades at 69 times forward earnings and 10 times next year's sales.
I believe Slack and Adobe both have room to grow as their core platforms disrupt and streamline traditional business processes. But if I had to pick one over the other, I'd stick with Adobe, because it's better diversified, has a wider moat, and is consistently profitable.