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Better Buy: Adobe Systems vs. Shopify

By Trevor Jennewine - Apr 29, 2021 at 9:15AM

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This is a battle of digital content versus digital commerce.

Adobe Systems (ADBE 1.68%) and Shopify (SHOP -2.82%) each play an important role in helping clients modernize their businesses. Both have also been market-beating investments over the last three years, with Adobe up 135% and Shopify surging 790%.

Looking ahead, as more content and commerce move to digital channels, both of these tech companies should continue to benefit. But which is the better buy today?

Adobe Systems: The digital content giant

Adobe is the third-largest software-as-a-service (SaaS) enterprise in the world. Since it was founded in 1982, it has grown into a $245 billion behemoth. The company's product portfolio spans two broad growth areas: digital media and digital experience.

Concept art depicting profitability versus growth.

Image source: Getty Images

In the digital media segment, Adobe Creative Cloud offers software tools that help clients design digital content, from graphic art to mobile application interfaces. Many of these products have captured significant market share -- for example, Adobe Premiere Pro is the industry-standard in video editing software across social, TV, and film.

In the digital experience segment, Adobe Experience Cloud (AEC) offers software tools that help clients create, manage, and deliver personalized marketing content. Research firm Gartner recently named AEC the industry leader, citing its customer data management and personalization capabilities as significant differentiators.

Adobe's financial performance in recent years has been stellar, driven by its strong competitive position in both digital media and digital experience.

Metric

2017

Q1 2021 (TTM)

CAGR

Revenue

$7.3 billion

$13.7 billion

21%

Free Cash Flow

$2.7 billion

$5.8 billion

26%

Data source: Adobe SEC filings. TTM = trailing-12-months. CAGR = compound annual growth rate.

In the first quarter of fiscal 2021, Adobe's financial performance exceeded the company's expectations. Revenue hit $3.9 billion, up 26% from the prior year, and earnings per share came in at $2.61, up 33%. These strong results led Adobe to raise its full-year guidance. In other words, this tech company is off to a strong start in 2021.

Shopify: The digital commerce giant

Shopify's global platform allows merchants to manage online storefronts across web and mobile platforms, as well as social media outlets like Facebook's Instagram and marketplaces like Amazon. The company also provides tools to assist with inventory management, payment processing, shipping and fulfillment, and customer relationship management.

In 2017 Shopify launched an accelerated payments solution: Shop Pay. Compared to traditional checkout, Shop Pay is four times faster, and its conversion rates are 1.7 times greater. In fact, according to Shopify: "Shop Pay is the fastest and best-converting checkout experience on the internet." That means it's more convenient for consumers and more effective for merchants. It also allows Shopify to tap into the digital payments market.

The company also recently added subscription options to Shopify Checkout, allowing merchants to sell subscription products directly through Shopify's platform. That's a big deal. Subscription revenue is recurring, which makes a seller's business more stable. Management believes the e-commerce subscription market will reach $478 billion by 2025. That represents a lot of upside for both Shopify and its merchants.

Shopify also believes that omnichannel is the future of retail, and the company has made efforts to support merchants with brick-and-mortar operations as well. For instance, Shopify offers hardware solutions like tap and chip card readers. Moreover, the company recently updated its point-of-sale (POS) software to unify management of both physical and digital storefronts.

In short, Shopify has made numerous investments to help its merchants succeed, and that growth strategy has paid off. The company achieved profitability in 2020, and has delivered strong financial results over the long term as well.

Metric

2017

2020

CAGR

Revenue

$673.3 million

$2.9 billion

63%

Free Cash Flow

($16.4 million)

$383.0 million

Data source: Shopify SEC filings. CAGR = compound annual growth rate.

Starting an online store can be daunting, but Shopify's platform removes much of the complexity for merchants, allowing them to focus on their businesses, not the infrastructure that supports them. Going forward, Shopify should continue to benefit as e-commerce becomes a bigger percentage of total retail sales. 

The verdict

I am a shareholder of both Adobe and Shopify, and I think both of these tech companies have what it takes to beat the market in the coming years. Adobe currently trades at 18 times sales and 45 times earnings, a much cheaper valuation than Shopify, which trades at 46 times sales and 431 times earnings.

However, Shopify is growing more quickly, and with a market cap of $135 billion, it's also a smaller company. What's more, I think Shopify's market opportunity in e-commerce (and digital payments) gives the company more long-term upside. That's why Shopify wins this contest.

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Stocks Mentioned

Shopify Inc. Stock Quote
Shopify Inc.
SHOP
$33.04 (-2.82%) $0.96
Adobe Inc. Stock Quote
Adobe Inc.
ADBE
$382.83 (1.68%) $6.34
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
META
$169.77 (0.94%) $1.58
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$114.33 (0.73%) $0.83

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

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