salesforce.com (CRM -0.29%) and Microsoft (MSFT -0.32%) are two juggernauts of the enterprise software market. Salesforce is the market leader in customer relationship management (CRM) software, and it also provides cloud-based e-commerce, marketing, and analytics services. Meanwhile, Microsoft's Windows is the world's top operating system for PCs, and it's transformed its desktop-based productivity software -- including Office and Dynamics CRM -- into cloud-based services over the past few years. It also owns Azure, the world's second-largest cloud infrastructure platform.
Over the past five years, Microsoft's stock more than quadrupled as Salesforce's stock tripled. But can Microsoft continue outperforming the CRM king this year?
The differences between Salesforce and Microsoft
Salesforce hosts all its services in the cloud. In the first nine months of fiscal 2021 (which started last February), it generated 27% of its revenue from its service cloud, 26% from its sales cloud, and 16% from its marketing and commerce cloud.
The remaining 31% came from its "platform and other" segment, which includes its Einstein AI platform, Tableau's data visualization service, and its application network builder Mulesoft. Like many other cloud companies, Salesforce uses a "land and expand" strategy, in which it locks customers in with its industry-leading CRM platform to cross-sell additional services.
Salesforce's tools help companies streamline their operations, automate repetitive tasks, break down data silos, and generally reduce their dependence on human employees. Its upcoming takeover of Slack (WORK) will tether together all those services with a unified communications platform.
Microsoft splits its sprawling business into three main segments. Its productivity and business processes segment, which includes Office, Dynamics, and LinkedIn, generated 32% of its revenue in fiscal 2020 (which ended last June).
Its intelligent cloud segment, which includes Azure and its other server products and IT services, generated 34% of its revenue. The remaining 34% came from its more personal computing segment, which includes its Windows licenses, Surface devices, Xbox consoles, and Bing.
Microsoft also separately discloses the growth of its "commercial cloud" business, including public cloud services like Office 365, Dynamics, and Azure, which generated over a third of its revenue in 2020.
Both companies were resistant to the pandemic
Salesforce and Microsoft both grew through the pandemic. Salesforce's revenue rose 26% year over year in the first nine months of fiscal 2021, with double-digit growth across all four of its businesses, as demand for its cloud services remained stable throughout the crisis.
It expects its revenue to rise 23% for the full year, then grow another 21% to about $25.5 billion next year. In December, it reiterated its long-term goal of roughly doubling its annual revenue to over $50 billion by fiscal 2026.
Salesforce expects its adjusted earnings to rise 55% this year, but analysts expect a 25% drop next year as it integrates Slack and ramps up its investments. But that lull should be temporary, and the stock still looks reasonably valued at 61 times forward earnings and eight times next year's sales.
Microsoft's revenue and adjusted earnings rose 12% and 14%, respectively, in fiscal 2020. Demand for its enterprise software decelerated during the pandemic, but the slowdown was brief and largely offset by the growth of its cloud, gaming, Surface, and consumer-facing software businesses, which all benefited from stay-at-home measures and remote work. Its commercial cloud revenue rose 36% for the full year.
Microsoft's momentum continued in the first quarter of 2021, as its revenue and adjusted earnings rose 12% and 32%, respectively. Analysts expect its revenue to climb 11% and 17%, respectively, for the full year, fueled by the expansion of its cloud ecosystem, robust sales of its new Xbox consoles, and a post-pandemic rebound in enterprise spending.
Microsoft's stock trades at 32 times forward earnings and nine times next year's sales. It also pays a forward dividend yield of 1%.
The winner: Salesforce
I like both stocks as long-term investments, but Salesforce has a simpler business model, it's better insulated from the pandemic, it generates stronger sales growth, and it offers investors clearer long-term targets. It's also surprisingly cheap relative to many of its peers in the frothy cloud services sector.
Those strengths make it a better buy than Microsoft, which has more moving parts, faces more competitors across multiple markets, and doesn't seem that cheap relative to its growth potential. I might nibble on Microsoft this year, but I feel much more confident about buying a big stake in Salesforce.