Adobe (ADBE -0.94%) and Snowflake (SNOW -0.44%) are both cloud software companies that have been upgrading their ecosystems with new AI features.
Adobe, which is best known for its cloud-based digital media software, has been expanding Firefly, a generative AI tool for creating pictures and digital models with text-based prompts. It can also be used to accelerate and automate tasks across its other cloud-based services.
Snowflake aggregates, cleans up, and stores data from a wide range of computing platforms in its data warehouses so they can be accessed by other apps. It's been rolling out its new Cortex generative AI tools to process that data more efficiently.
Yet, neither stock has impressed the bulls this year. As of this writing, Adobe's stock has declined 17% year to date, while Snowflake's stock has stumbled 23%. Let's see if either of these out-of-favor tech stocks is still worth buying.
Image source: Getty Images.
Adobe faces competitive and regulatory challenges
Over the past decade, Adobe converted its desktop applications into cloud-based services. That bold move locked its customers into sticky recurring subscriptions and preserved its dominance of the digital media software market. This also enabled it to roll out additional cloud-based sales, marketing, and analytics services.
From fiscal 2013 to 2023 (which ended on Dec. 1, 2023), Adobe's revenue expanded at a compound annual growth rate (CAGR) of 17% as its earnings per share (EPS) increased at a CAGR of 28%. But from fiscal 2023 to 2026, analysts only expect Adobe's revenue to grow at a CAGR of 11% as its EPS rises at a CAGR of 17%.
Adobe is still growing, but it faces tough competitive and regulatory challenges. Figma is gaining ground against Adobe XD in the user interface (UI) and user experience (UX) software design markets, Canva is challenging Photoshop with its web-based image editing tools, and even Microsoft is evolving into a dangerous challenger with its AI-powered Bing Image Creator and Designer platforms. Adobe tried to buy Figma for $20 billion, but it was forced to abandon the deal last December -- and pay its smaller rival a $1 billion termination fee -- after it was scuttled by antitrust regulators.
Adobe also recently disclosed that the U.S. Federal Trade Commission (FTC) had launched a probe into its subscription cancellation policies and fees, and admitted that it could incur "significant monetary costs or penalties" to settle that investigation. Adobe's subscriptions could be hit by rigid new restrictions in a potential settlement.
Adobe is trying to counter these headwinds by raising its prices, cutting costs, and buying back a lot of shares. But its stock isn't a screaming bargain at 28 times forward earnings, and insiders have been net sellers over the past 12 months.
Snowflake also faces tough near-term challenges
Snowflake's data warehouses break down silos across large organizations by pulling their real-time data into centralized locations. It isn't tethered to a larger cloud infrastructure platform, and only charges customers usage-based fees for the storage and computing power they need instead of locking them into sticky subscriptions.
Snowflake initially dazzled the bulls with its growth rates after its public debut in 2020. Its product revenue, which accounts for most of its top line, rose at a CAGR of 69% from fiscal 2021 to 2024 (which ended on Jan. 31, 2024).
It isn't profitable on a generally accepted accounting principles (GAAP) basis, but it posted a non-GAAP profit in fiscal 2022. That figure, which excludes its stock-based compensation, soared 25-fold in fiscal 2023 and nearly quadrupled in fiscal 2024.
But Snowflake's growth is cooling off. From fiscal 2024 to 2026, analysts expect its revenue to only rise at a CAGR of 23% as it remains deeply unprofitable on a GAAP basis. That slowdown, which it mainly attributes to tougher macro headwinds for software spending, suggests it could broadly miss its long-term target of growing its annual product revenue to $10 billion by fiscal 2029, which would represent a six-year CAGR of 30% from fiscal 2024.
The recent resignation of CEO Frank Slootman, who set that ambitious goal during an investor day presentation in 2022, raises even more red flags for its future. Furthermore, Snowflake's stock isn't cheap at over 200 times forward earnings and 15 times this year's sales, and its insiders have sold six times as many shares as they bought over the past 12 months.
The better buy: Adobe
I recently said it was smarter to sell Adobe than to buy it, since the competitive threats and regulatory challenges could drive its stock a lot lower. However, I'm even less enthusiastic about Snowflake, which simply looks too pricey relative to its growth.
I wouldn't rush to buy either of these beaten-down stocks right now. But if Adobe's stock gets a bit cheaper and it resolves its most pressing issues, I'd consider nibbling on it again. As for Snowflake, I would need to see if it can stabilize its product revenue growth and meaningfully narrow its GAAP losses before I'd consider it a worthwhile long-term investment.
