Investors have pushed Microsoft (MSFT 1.82%) stock to new highs in recent weeks. The tech giant's share price performance is trouncing the wider market, having soared nearly 60% this year. By comparison, the Nasdaq Composite gained 36%.
Some investors are concerned that this rally has made Microsoft a less compelling growth stock. It's approaching $3 trillion in market capitalization, after all, and Wall Street is well aware of its many sales catalysts ahead. These include artificial intelligence (AI) and the rising demand for video games and cybersecurity software in the years to come.
If you'd like exposure to some of these industries but are turned off by Microsoft's elevated valuation, there are some good alternatives to consider. Read on for reasons to buy Adobe (ADBE 0.87%) and Palo Alto Networks (PANW 0.91%), instead.
Adobe is cashing in on AI
Adobe stock is riding on a wave of enthusiasm about generative AI, but it isn't just hype that's elevating investor sentiment in 2023. The software giant is already capitalizing on AI tech that's made its way into products like Photoshop and Premiere Pro. In mid-September, Adobe revealed that higher demand across its portfolio has helped push profit to $4.9 billion in the first half of 2023, up from $4.5 billion a year earlier.
Adobe's focus on content creation positions it well to take full advantage of the rising value that AI is delivering. You can see evidence of that excitement in the fact that people have generated 2 billion images using its new Firefly software in just the first six months following its release. Subscription services are rising, too, contributing to impressive cash-flow trends.
The company is valued at a premium to Microsoft. But growth-stock investors see good reasons to like shares at the current valuation of 15x sales, compared to Microsoft's price-to-sales ratio (P/S) of 13. Its smaller sales footprint and greater focus on creative content could make Adobe a huge winner in the next era of computing tech.
Palo Alto Networks can keep its momentum
Microsoft offers cybersecurity protection as part of its huge services platform, but investors might earn better returns from owning Palo Alto Networks over the next several years. Sure, investors were a bit disappointed with the company's earnings update in late November, which showed slowing billings trends.
Yet sales were up a healthy 20% in the Q3 period and are on track to rise at nearly the same pace for the full year. Most Wall Street pros are looking for Microsoft to grow at 4% this fiscal year, by contrast.
An investment in Palo Alto Networks doesn't offer nearly the same level of diversity and safety that comes along with Microsoft's massive global sales base. You don't get a dividend from owning this cybersecurity business, either.
Still, investors who value growth will love Palo Alto Networks' expanding market share and its healthy market share in a competitive niche. Management is determined to keep boosting profitability, as well, building on the excellent momentum that shareholders saw here last year.
As is the case with Adobe, you'll pay a higher premium to own Palo Alto right now, as compared to late 2022. But for roughly the same price-to-sales valuation as Microsoft, you'll get exposure to a leading software-as-a-service provider in an industry that's likely to see fantastic growth over the next several years.
