Adobe (ADBE 3.33%) and Microsoft (MSFT 2.30%) are both often considered blue chip tech stalwarts instead of exciting growth stocks. Yet both of these tech giants are also plugged into the secular growth of the generative artificial intelligence (AI) market, which includes the popular chatbot ChatGPT and art generators like Midjourney and DALL-E.
Adobe recently launched Firefly, a generative AI platform for the Creative Cloud that enables its users to create images, videos, and digital models with simple text-based prompts.
Microsoft is one of the biggest backers of OpenAI, the creator of ChatGPT and DALL-E, and it has already integrated ChatGPT into its own Bing search engine and Azure cloud infrastructure platform. Its Bing Image Creator also enables its users to create AI-generated images through DALL-E.
Image source: Getty Images.
Those generative AI efforts aren't meaningfully boosting Adobe's and Microsoft's revenue yet, but their long-term growth potential (along with the buying frenzy in AI stocks) brought back a lot of bulls. That's why both stocks have risen more than 30% since the start of the year. But should you buy either Adobe or Microsoft as a long-term play on the AI market?
Reviewing the similarities and differences
Over the past decade, Adobe and Microsoft both transformed their desktop-based applications into cloud-based services and mobile apps. That bold strategy locked in their customers with stickier subscription plans and eliminated their dependence on unpredictable upgrade cycles for on-site software.
NASDAQ: ADBE
Key Data Points
But beyond those cloud-based transformations, their underlying businesses are very different. More than half of Adobe's revenue usually comes from the Creative Cloud, which houses Photoshop, Illustrator, Premiere Pro, and its other industry-standard digital media tools. The rest of its revenue comes from its Document Cloud services (Adobe Acrobat and Sign), as well as its other cloud-based marketing, analytics, and e-commerce tools.
Microsoft doesn't provide any industry-leading digital media or e-document services like Adobe. Instead, it generates most of its revenue from its Windows operating system, Office 365 productivity services, and Azure cloud infrastructure services. A much smaller slice of its revenue comes from its Xbox gaming business and Surface computing devices.
NASDAQ: MSFT
Key Data Points
Adobe and Microsoft have both been trying to close big acquisitions over the past year. Adobe is trying to buy Figma, a growing competitor in the user-interface and user-experience design markets, for $20 billion. Adobe believes it can close that deal by the end of fiscal 2023 (which ends this December).
Meanwhile, Microsoft is trying to acquire the video game company Activision Blizzard for $69 billion to expand its Xbox business, but the deal faces a lot of regulatory hurdles.
Which company is growing faster?
Adobe expects its revenue to rise 9% in fiscal 2023, compared to its 12% growth in fiscal 2022, as the macro headwinds force companies to rein in their software spending. But it also expects its adjusted EPS to grow 12% to 14% this year, compared to its 10% earnings growth in fiscal 2022, as it cuts costs. Those estimates don't include its planned acquisition of Figma.
Microsoft's revenue and adjusted EPS grew 18% and 16%, respectively, in fiscal 2022 (which ended last June). That growth was mainly driven by Azure and its other cloud-based services. But in fiscal 2023, analysts expect its revenue and adjusted EPS to rise only 7% and 5%, respectively, as the growth of its cloud business cools off. Those estimates also don't factor in its planned takeover of Activision -- or the $3 billion termination fee it will need to pay if the deal falls through.
Both stocks have comparable valuations: Adobe trades at 27 times forward earnings, while Microsoft has a forward multiple of 29. Adobe doesn't pay a dividend, but Microsoft's paltry forward yield of 0.8% won't impress any serious income investors.
Which company is the better AI play?
Both of these tech titans are solid long-term investments. But if we're only talking about the benefits of generative AI, I believe Adobe will be the better play. Its Firefly could represent a massive upgrade for its Creative Cloud, which already dominates the market for digital media editing software.
Microsoft's ChatGPT upgrade for Bing is arguably less meaningful, since Bing is still a distant underdog in the search market compared to Alphabet's Google.
Google also recently launched its own generative AI service, Bard, to counter ChatGPT. Microsoft's AI enhancements for Azure face the same dilemma: Azure is still smaller than Amazon Web Services (AWS), which rolled out Bedrock, its own platform for building and scaling generative AI services, earlier this year.
In other words, it all boils down to the competition. I don't see Adobe's Creative Cloud or Firefly facing any meaningful competitors for the foreseeable future, but Microsoft's AI upgrades will merely help it keep pace with Google and Amazon. That's why I believe this generative AI trend will generate much stronger tailwinds for Adobe than for Microsoft.
