Almost everything we interact with in our daily lives makes use of some version of software. It's everywhere. The trend toward tech ubiquity isn't likely to slow down anytime soon, making software companies interesting as potential long-term investments.
Here are two that are leaders in their respective segments of that industry, and that look to be great stocks to buy for the long haul.
Microsoft
For years, Microsoft (MSFT -1.22%) was one of the first names that came to mind when anyone thought about software. When personal computing was new, its Windows operating system and its suite of productivity software (that includes Word and Excel) made it almost impossible not to interact with the company's software.
As the years passed, competition increased but Microsoft persevered. More recently, the company's focus on cloud computing vaulted it back into the upper echelon of businesses, driving its market cap to over $2.4 trillion and making it one of the most valuable companies in the world.
In fact, Microsoft's cloud computing segment could be what drives its business results for years to come. In a company memo that was recently made public as part of a court hearing over Microsoft's proposed acquisition of Activision Blizzard, CEO Satya Nadella wrote that the company is aiming for $500 billion in annual revenues by 2030. That's more than double the company's 2022 revenue of $204 billion.
Nadella also projected that shareholders would be rewarded with dividends and share buybacks. This is easy to believe considering Microsoft's track record in those areas.
MSFT Shares Outstanding data by YCharts.
You shouldn't make investment decisions based solely on an internal company memo, but this one does show Nadella's optimism about the business's potential. And Microsoft's position as the No. 2 cloud provider alone could make this projection plausible.
Adobe
Another company with a suite of software that almost everyone has likely used is Adobe (ADBE -0.64%). Beyond its creative programs like Photoshop and Illustrator, anyone who has ever opened a PDF has used an Adobe product. Adobe was also one of the first major software companies to transition to the software as a service (SaaS) model, where its customers pay for their software via recurring subscriptions rather than making one-time purchases.
The news surrounding Adobe for the last several months has been related to its proposed acquisition of Figma, which is under review by federal regulators. More recently, Adobe announced its creative artificial intelligence (AI) engine, Firefly. Essentially, this allows generative AI to assist people in the creative process in its creative suite of software.
Lately, AI has been mentioned in many company earnings reports and press releases, so investors should review each claim that a business about to boost itself using the technology with a skeptical eye. However, in the case of Adobe, it makes a lot of sense. For example, a photographer could use Photoshop to enhance a photo simply by typing in the desired effect, rather than spending time making those changes manually. For professional creators on tight deadlines, features like that could be welcome time-savers that make Adobe software even stickier for its users.
Both have decent valuations
Part of what makes successful investors successful is the ability to identify companies that are leaders in areas where there are long-term growth drivers. In the case of Microsoft and Adobe, there are compelling cases to be made that each will remain an important player in its respective industries.
Another key to successful investing is buying stocks at the right price. Both of these stocks trade for around the same price-to-sales multiple: Microsoft's is 11.8, while Adobe's is 12.1. Neither of these multiples would be considered cheap, but both are near or below their three-year averages. For long-term investors, neither company's current valuation should be a reason to stay away from its stock.
