Adobe (ADBE -1.09%) and Salesforce (CRM -1.27%) are both bellwethers of the cloud software market. Adobe's Photoshop, Illustrator, and Premiere Pro -- all housed in its Creative Cloud -- are industry-standard tools for media professionals. Its Acrobat PDF and e-signature apps are also widely used by its enterprise customers alongside its other cloud-based e-commerce, marketing, and analytics services.
Salesforce owns the world's largest cloud-based customer relationship management (CRM) platform. Like Adobe, it also expanded that ecosystem with additional cloud-based marketing, data analytics, and collaboration services.
Image source: Getty Images.
I compared these two cloud stocks back in Sept. 2021 and concluded that Salesforce's more balanced growth and lower valuation made it the better buy. But since I made that call, Salesforce's stock declined 25% as Adobe's stock slumped 33%. Both stocks lost their luster as the macro headwinds curbed their near-term growth and interest rates deflated their frothy valuations. But could either of these out-of-favor cloud kings be worth buying again before a new bull market starts?
Adobe continues to face tough macro headwinds
Adobe expects its revenue to rise only 9% in fiscal 2023 (which will end in early December) compared to its 12% growth in fiscal 2022 and 23% in fiscal 2021.
It blames that slowdown on the macro headwinds that forced many companies to rein in their software spending. However, it expects its adjusted earnings per share (EPS) to grow 12%-14% in fiscal 2023, which would represent an acceleration from its 10% growth in fiscal 2022, as it streamlines its spending to cope with its slower sales growth.
However, Adobe's revenue and earnings outlook for fiscal 2023 doesn't include any gains from its planned $20 billion takeover of the design software start-up Figma, which competes against Adobe's own XD platform in the user interface (UI) and user experience (UX) design markets. Adobe insists it can close that massive half-cash, half-stock deal by the end of fiscal 2023 but hasn't cleared all the regulatory hurdles yet. Adobe's critics claim that acquiring Figma would further solidify the company's control of the digital media and design markets.
Meanwhile, Adobe is still spending a large portion of its free cash flow (FCF) on big buybacks. It reduced its outstanding share count by more than 4% over the past three years, and it still has $5.2 billion remaining in its current $15 billion buyback authorization -- which will last through the end of fiscal 2024. Adobe's stock still looks reasonably valued at 24 times forward earnings, and its growth will likely accelerate again once the macroeconomic environment improves.
Salesforce is cutting costs to cope with the downturn
Salesforce expects its revenue to rise 10% in fiscal 2024 (which ends next January), which would also mark a slowdown from its 18% growth in fiscal 2023 and 25% in fiscal 2022. That deceleration was mainly caused by macroeconomic and currency-related headwinds.
But unlike Adobe -- which only let 100 employees go last December and doesn't plan to execute any mass layoffs -- Salesforce abruptly laid off about 8,000 employees, or 10% of its workforce, at the beginning of this year. It also hinted at additional layoffs throughout the rest of the year as it focuses on boosting its operating margins. It even launched its first buyback plan last year, then doubled that authorization from $10 billion to $20 billion earlier this year.
As a result, Salesforce expects its adjusted EPS to rise 36% in fiscal 2024 compared to its 10% growth in fiscal 2023 and 3% decline in fiscal 2022. That accelerating earnings growth could appease the activist investors who ramped up their pressure on Salesforce over the past year. Still, there's a risk that it could toss out its babies with the bathwater and weaken its own defenses against Microsoft, Oracle, and SAP in the CRM market.
Moreover, investors should recall it already lost a long list of top leaders -- including co-CEO Bret Taylor, Chief Strategy Officer Gavin Patterson, Chief Marketing Officer Stephanie Buscemi, Slack CEO Stewart Butterfield, and Tableau CEO Mark Nelson -- as it streamlined its sprawling business.
Salesforce's stock looks a bit pricier than Adobe's at 27 times forward earnings, but it's also growing faster and has no unresolved acquisitions hanging over its stock.
The better buy: Salesforce
Salesforce's aggressive cost-cutting measures seem risky, but they were long overdue after years of big acquisitions and hiring sprees. If it successfully streamlines its business this year, it could emerge as a leaner, more profitable tech giant that generates more predictable returns. Adobe is still a good long-term investment, but its slower growth and massive commitment to Figma could make it a less appealing investment than Salesforce for the rest of the year.
