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Better Buy: Adobe vs. Autodesk

By Leo Sun - Jan 28, 2021 at 11:00AM

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Which resilient software company will generate bigger gains in 2021?

Adobe (ADBE 1.19%) and Autodesk (ADSK -1.19%) are both household names for designers and media professionals. Adobe's creative software products -- including Photoshop, Premiere Pro, Illustrator, and After Effects -- are widely used by media professionals, and the company also provides cloud-based services for enterprise customers.

Autodesk produces AutoCAD, which revolutionized computer-aided drafting, and design software like Sketchbook and Inventor. Its 3ds Max and Maya platforms are also widely used for creating 3D animations.

Both companies remained resilient throughout the pandemic. Over the past 12 months, Adobe's stock rallied about 35% as Autodesk's stock advanced nearly 50%. Let's see how both software companies weathered the crisis, and if one of these stocks is a better all-around investment.

A young woman uses a laptop.

Image source: Getty Images.

The differences between Adobe and Autodesk

Adobe has transformed all its desktop-based software into subscription-based cloud services over the past few years. It now hosts all its design software in the Creative and Document Clouds, which are included in the Digital Media segment, which generated 72% of the company's revenue in fiscal 2020.

The rest of Adobe's revenue came from its Digital Experience unit, which offers cloud-based advertising, analytics, and e-commerce services to enterprise customers. These businesses compete against other big players like Salesforce and Shopify.

Autodesk splits its software portfolio into four main groups: AEC (Architecture, Engineering, and Construction), AutoCAD, MFG (Manufacturing), and M&E (Media and Entertainment).

Autodesk generated 44% of its revenue from AEC software in the first nine months of fiscal 2021, which started last January. Another 30% came from its AutoCAD products, 20% came from its MFG software, and 6% came from its M&E software. Autodesk has also transformed most of its desktop-based software into subscription-based cloud services, but its subscriptions are significantly pricier than Adobe's.

How fast are Adobe and Autodesk growing?

Adobe's revenue rose 15% to $12.87 billion in 2020. Its Digital Media revenue rose 20%, thanks to stable demand for its Creative and Document Cloud services throughout the pandemic.

Its Digital Experience revenue rose 12%, as the slower growth of its advertising cloud during the pandemic offset the stronger growth of its other enterprise-facing clouds. Adobe also discontinued the advertising cloud's lower-margin managed service for programmatic TV ads during the year.

Despite those challenges, Adobe's adjusted operating margin still expanded from 39.9% to 42.9%, and its adjusted EPS rose 28% as it spent $3 billion on buybacks. It repurchased those shares at an average price of $376.38 per share, which is 20% lower than its current price.

Adobe expects its revenue to rise 18% in fiscal 2021, with similar growth rates at both its Digital Media and Experience segments, and for its adjusted earnings to grow 11%.

A graphic designer works on a project.

Image source: Getty Images.

Autodesk's revenue rose 16% year-over-year to $2.75 billion in the first nine months of fiscal 2021. All four of its segments grew, with the AEC and AutoCAD segments generating double-digit growth and the MFG and M&E segments posting single-digit growth.

Autodesk's retention rate remained above 100% throughout the crisis, which indicates companies didn't stop using its industry-standard design and animation software even as the pandemic disrupted their businesses. Autodesk's operating margin expanded year-over-year from 8.8% to 16.1% in the first nine months as lower spending during the pandemic -- especially on travel -- reduced its operating expenses.

Autodesk repurchased $399 million in shares at an average price of $185.69 during those nine months, which marks a 36% discount to its current price. Those buybacks, along with its stable revenue growth and rising margins, boosted its adjusted EPS 53% year-over-year.

Autodesk expects its revenue to rise 15% for the full year, and for its adjusted earnings to increase 40%-42%. Next year, analysts expect its revenue and earnings to rise 14% and 31%, respectively.

The valuations and verdict

Adobe and Autodesk share similar strengths. They both provide essential subscription-based software for professionals, they generate double-digit revenue and earnings growth, and they execute smart buyback plans.

However, Adobe's stock is significantly cheaper at 36 times forward earnings and 13 times next year's sales. Autodesk has a forward P/E ratio of 57 and trades at 15 times next year's sales.

That lower valuation, along with Adobe's more diversified cloud platforms and the gradual recovery of its advertising cloud, could make Adobe a better buy than Autodesk right now. Autodesk is still a solid long-term investment, but its higher valuation could limit its upside potential this year.

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Stocks Mentioned

Adobe Inc. Stock Quote
Adobe Inc.
ADBE
$399.09 (1.19%) $4.71
salesforce.com, inc. Stock Quote
salesforce.com, inc.
CRM
$159.65 (2.60%) $4.05
Autodesk, Inc. Stock Quote
Autodesk, Inc.
ADSK
$191.41 (-1.19%) $-2.31
Shopify Inc. Stock Quote
Shopify Inc.
SHOP
$363.85 (-7.02%) $-27.48

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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