Better Buy: Adobe vs. Slack

Both Adobe (ADBE 0.89%) and Slack (WORK) have benefited from pandemic-driven digitization, and each has outperformed the broader market over the last 12 months. But while Adobe is up 33%, shares of Slack have surged 69%.

However, in December 2020, salesforce.com (CRM -0.18%) announced that it will acquire the collaboration specialist, though the deal isn't expected to close for another few months. That makes this showdown a little more complex (and interesting). So which one is the better buy today?

Adobe: The creativity giant

Adobe's business focuses on three strategic growth areas: digital documents, creativity, and customer experience. Given the global push toward digital solutions, management estimates the company's market opportunity will reach $147 billion by 2023.

Image source: Getty Images.

Adobe Creative Cloud includes many well-known applications like Photoshop for image editing and Dreamweaver for website design, both of which are industry-leading solutions. But Adobe's more recent innovations have also gained traction. For instance, Adobe Creative Cloud Express (formerly known as Adobe Spark) helps brands and influencers create high-quality social media content. This ability to adapt as new media formats arise is an indicator of a well-managed business.

Adobe Experience Cloud builds on its Creative Cloud solutions, helping brands blend content with data-driven marketing, analytics, and commerce. For instance, Adobe's digital experience platform collects consumer data to create real-time profiles that can be used to deliver targeted ads or personalized web content. In fact, research firm Gartner recently named Adobe the market leader in this space, ahead of competitors like Salesforce and Oracle.

Adobe's ability to integrate these two segments is the heart of its competitive edge. In other words, Adobe is an end-to-end solution for creative professionals and marketers alike, and that has been a powerful growth driver for the company.

Data source: Adobe SEC Filings.

While Adobe's top-line growth has been stellar -- especially for a well-established business that's been around since the early 1980s -- the company's most impressive feat has been margin expansion. Adobe has shifted away from software licensing to a software-as-a-service (SaaS) business model, driving its operating margin upward from 19% in 2015 to 33% in 2020. In other words, the company's strong revenue growth has been magnified by operational efficiencies, and that has translated into even faster growth in free cash flow.

Slack: The collaboration specialist

On Dec. 1, 2020, Salesforce acquired Slack for roughly $27.7 billion in a deal that is expected to close in the second quarter of fiscal 2022 (by July 31, 2021). As part of the agreement, Slack shareholders will receive $26.79 in cash and 0.0776 shares of Salesforce stock. In other words, if the deal closed today, Slack shareholders would receive about $45.44 per share. That makes this situation complicated or, at the very least, strange. Investors who buy Slack at this point are essentially buying Salesforce, so let's look at both.

Slack's messaging platform replaces traditional corporate channels like email, allowing teams to collaborate more efficiently and work more productively. As of the most recent quarter, Slack had over 142,000 paying customers and a 123% retention rate, which means the company is keeping its clients. But Slack has one big problem: Microsoft Teams.

Image source: Getty Images.

Both Microsoft and Slack have a strong presence in the business of instant messaging and internal communications markets, though Slack has a greater share of small and mid-market clients, and Microsoft Teams is more common with larger enterprises. But Microsoft's ability to bundle Teams with Microsoft 365 subscriptions gives the company a big advantage. It's much simpler for clients to use a product they already have, and many businesses using Microsoft 365 already have Teams.

Despite this, Salesforce CEO Marc Benioff is optimistic about the merger. The company plans to revamp its Salesforce Customer 360 platform, making Slack the new user interface. Salesforce will also integrate Slack's functionality into its own customer relationship management (CRM) software, making it easier for employees, customers, and partners to connect and communicate. This could strengthen Salesforce's already-strong position in various markets, from customer service and sales to marketing and analytics. In fact, Salesforce estimates that the acquisition will drive revenue growth to $50 billion by fiscal 2026.

Like Adobe, Salesforce is a well-run business with a big market opportunity -- $175 billion by 2025, according to management. Moreover, Salesforce generates more revenue and is growing more quickly than Adobe, though its operating margin is considerably lower. In fact, over the last five years, the company's operating margin has never topped 6%. As a result, Salesforce is much less profitable than Adobe.

Data source: Salesforce SEC Filings. Note: Q3 2021 ended Oct. 31, 2020. TTM = trailing 12 months.

Investors should watch the Salesforce and Slack merger closely. Blending two businesses can be tricky, but it can also create revenue synergies and operating efficiencies. Moreover, Salesforce acquired Tableau in 2019 to boost its analytics capabilities, and so far that merger has been a success. If the company can pull off a repeat here, it could help supercharge growth.

The final word

In a contest between Adobe and Slack, Adobe wins. Slack has a sticky product and a growing user base, but it doesn't make sense to buy the stock now, since the share price of Salesforce is the only variable. Moreover, Adobe has an enormous runway for growth, and the company's industry-leading software tools and highly profitable business set Adobe up for long-term success.

That being said, Salesforce is also an innovative, quickly growing business, and the acquisition of Slack could unlock new opportunities for the company. For that reason, I don't think investors can go wrong picking up a few shares of both Adobe and Salesforce.