Adobe (ADBE 0.87%) and Salesforce (CRM 0.42%) are two of the world's largest cloud software companies. Adobe transformed its desktop-based media software into cloud-based services over the past decade, while Salesforce owns the world's leading cloud-based customer relationship management (CRM) platform. Both companies also provide additional sales, marketing, e-commerce, and analytics services.
Adobe and Salesforce both reached their all-time highs during the apex of the growth stock rally in November 2021. But both stocks have pulled back over the following two years as rising interest rates drove investors toward more conservative investments. Should you invest in either of these cloud giants before the market heats up again?
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Adobe faces slower growth and regulatory challenges
Adobe's revenue grew at a compound annual growth rate (CAGR) of 19% from fiscal 2017 to fiscal 2022 (which ended on Dec. 2, 2022). But in fiscal 2023, its revenue only rose 10%, and it expects just 10%-11% growth in fiscal 2024.
Adobe's Digital Media segment, which accounted for 73% of its revenue in fiscal 2023, is still growing at a steady rate as it locks media professionals into its sticky subscriptions. But its enterprise-facing Digital Experience segment, which accounted for 25% of its revenue, faced tougher macro headwinds over the past year. Currency headwinds also reduced its reported revenue growth by three percentage points for the full year.
Adobe's slower growth disappointed investors, who had expected its new generative AI tools -- which can be used to create AI images, photos, and 3D models, as well as accelerate other enterprise tasks -- to boost its near-term sales.
Adobe's operating margins are still rising and its adjusted EPS grew 17% in fiscal 2023, but it expects just 10%-12% growth in fiscal 2024. It also recently warned it could incur "significant monetary costs" to settle a Federal Trade Commission (FTC) probe into the cancellation policies for its subscriptions, and its $20 billion acquisition of Figma remains in limbo due to antitrust challenges. Adobe's EPS outlook for fiscal 2024 doesn't account for either of those unpredictable factors.
That combination of slowing growth and regulatory headwinds spooked the bulls, who had rushed back to Adobe amid the buying frenzy in AI stocks. Even after its post-earnings decline, it still doesn't look cheap at 33 times forward earnings.
Salesforce is prioritizing its profits over its sales growth
Salesforce's revenue rose at a CAGR of 26% from fiscal 2017 to fiscal 2022 (which ended on Jan. 31, 2022). But its revenue only increased 18% in fiscal 2023, and it expects just 11% growth in fiscal 2024.
Salesforce faces many of the same challenges as Adobe. The macro headwinds made it difficult to lock bigger customers into longer contracts, while the currency headwinds reduced its reported revenue by four percentage points in fiscal 2023.
Salesforce has also been expanding its AI ecosystem to analyze its customer data more efficiently and accelerate certain tasks. But those new services aren't moving the needle on their own yet -- and Salesforce still faces stiff competition from Microsoft, Oracle, and other tech giants in the CRM market.
Over the past year, the stabilizing growth of Salesforce's platform and other business (which houses Lightning and Slack) and the accelerating growth of its data cloud (which includes Mulesoft and Tableau) offset the slower growth of its sales cloud, service cloud, and marketing & commerce cloud businesses. But those three weaker businesses -- which together accounted for 65% of its revenue in the first nine months of fiscal 2024 -- could recover as the macro environment improves.
Activist investors besieged Salesforce throughout the first half of calendar 2023, but they backed off as it significantly boosted its operating margins and earnings by laying off 10% of its workforce and reining in its spending. Its adjusted EPS only rose 10% in fiscal 2023, but it expects an acceleration to 56% growth in fiscal 2024.
Salesforce's stock looks cheap at 29 times next year's earnings, but the bears warn that its prioritization of profitability over sales growth could narrow its competitive moat in the crowded cloud software market.
The better buy: Salesforce
I'm not a big fan of either stock right now because the flaws are easy to spot. But if I had to choose one over the other, I'd pick Salesforce. Its profit growth is accelerating, its stock is cheaper, and it doesn't face any regulatory challenges.
