Autodesk (ADSK +1.25%) and Salesforce (CRM 1.55%) both operate sticky cloud-based ecosystems. Autodesk, the publisher of AutoCAD, provides cloud-based subscriptions for its industry-standard design, engineering, architecture, construction, and media software. Salesforce is the world's largest provider of cloud-based customer relationship management (CRM) software, and it also offers cloud-based sales, marketing, and analytics services.
Both companies lock customers into recurring subscriptions, which generate more stable revenue than stand-alone software installations. That model is also relatively resistant to macroeconomic headwinds, which generally won't prevent most users and companies from renewing their subscriptions.
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However, both cloud stocks have also declined by about 20% over the past two months as rising inflation and higher interest rates rattled the tech sector. Should investors consider buying the dip in either stock right now?
Autodesk faces a minor slowdown
Autodesk's revenue rose 16% to $3.8 billion in fiscal 2021, which ended last January. Its design-oriented revenue increased 15% to $3.4 billion, and its manufacturing-oriented revenue grew 36% to $296 million. Its total number of subscriptions increased 8% to 5.3 million.
Its adjusted operating margin expanded from 24% to 29%, while its adjusted earnings per share grew by 45%. Those robust growth rates indicated it was well-insulated from the pandemic.
Autodesk expects its revenue to grow 15% in fiscal 2022, and for its adjusted earnings to increase between 23% and 24%. Those full-year estimates, which it presented during its third-quarter report last November, matched analysts' expectations, but its guidance for the fourth quarter came in slightly below their projections for the top and bottom lines.
Autodesk attributed that slight slowdown to supply chain disruptions, inflationary pressure, a global labor shortage, the "ebb and flow" of COVID, and the weakness of its architecture, engineering, and construction (AEC) portfolio in China. Although, its full-year forecast indicates those challenges will mostly be temporary. Analysts expect its revenue and earnings to grow 17% and 36%, respectively, next year as those headwinds wane.
Salesforce faces similar challenges
Salesforce's revenue rose 24% to $21.3 billion in fiscal 2021, which ended last January. All five of its core segments -- sales, service, platform, data, and marketing & commerce -- generated high double-digit sales growth. Salesforce's adjusted operating margin expanded 90 basis points to 17.7% during the year, while its adjusted earnings per share grew 65%.
For fiscal 2022, Salesforce expects its revenue to rise about 24% and for its adjusted operating margin to expand to 18.6%. However, it expects its adjusted earnings to dip about 5% as it integrates Slack (which it acquired last July) and it faces a difficult year-over-year comparison to the accounting changes related to its strategic investments last year.
Salesforce's guidance looks healthy, but its revenue forecasts for the fourth and first quarters slightly missed analysts' expectations. Still, it reiterated its goal of nearly doubling its annual revenue to $50 billion by fiscal 2026 -- which indicates any slowdown should be short-lived.
Analysts expect Salesforce's revenue to grow 20% in fiscal 2023, but for its adjusted earnings to grow just 1% as it ramps up its investments again.
The valuations and verdict
Autodesk and Salesforce both have resilient business models, but both stocks got a bit overheated during the tech sector's pandemic-induced rally in 2020 and early 2021. As a result, the stocks underperformed the S&P 500 in 2021 and lost their momentum as interest rates rose.
But today, both cloud software stocks look more reasonably valued than they did at the peak of the pandemic. Autodesk trades at 39 times forward earnings and eleven times next year's sales. Salesforce trades at 58 times forward earnings and trades at seven times next year's sales.
Neither stock can be considered a screaming bargain yet, but Autodesk and Salesforce each provide stable growth, sticky services, wide moats, and firm profits. Those four strengths could make both stocks attractive safe-haven investments as higher interest rates crush their more speculative peers.
Autodesk and Salesforce remain solid long-term investments. But if I had to choose one over the other, I'd pick Autodesk for three simple reasons: Its growth rates are more stable, it isn't in the process of integrating a massive acquisition, and its stock is trading at a lower multiple.
