We think that Adobe’s stock (NASDAQ: ADBE) currently is a better pick compared to Salesforce.com’s stock (NYSE: CRM). Salesforce.com’s stock trades at about 11.4x trailing revenues, compared to around 18x for Adobe. Does this gap in the companies’ valuations make sense? We believe so. Salesforce.com has seen better revenue growth over the last three years while Adobe’s revenues growth has not been far behind. With respect to operating margins Salesforce.com saw a fall over the last three years while Adobe’s margin has been increasing. However, there is more to the comparison, which makes Adobe a better bet than Salesforce.com at these valuations. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating income and operating margin growth. Our dashboard Salesforce.com vs Adobe: Industry Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.
1. Salesforce.com Edges Out On Revenue Growth
With Salesforce.com’s fiscal year ending in January, its ongoing FY is 2022 while Adobe’s year ends in November and its ongoing FY is 2021. If compared on the basis of the past three years, Salesforce.com is better than Adobe in revenue growth. Salesforce.com’s revenue was recorded at $23.5 billion in the last twelve months period compared to $13.3 billion in FY 2019 (a jump of 76%). On a comparable basis, Adobe’s revenue was recorded at $15.1 billion in the last twelve months period compared to $9 billion in FY 2018 (a rise of 68%). Further, for the most recent quarter (Q2’22 for Salesforce.com and Q2’21 for Adobe), Salesforce.com’s revenues jumped 23% YoY, while Adobe’s jumped similarly by 22% YoY.
Despite better revenue growth of Salesforce.com, it does not give it a clear advantage as Adobe’s revenue growth is not very different.
2. Adobe Clear Winner On Margins
Salesforce.com’s EBIT margin was 4.4% in the last twelve month period compared to 36.5% for Adobe, and over the last three years operating margin for Salesforce.com has fallen by 1.5% compared to a 1.5% rise by Adobe. Adobe’s much higher margins have offset its slightly lower revenue growth and hence seems a better bet.
Adobe has a better debt position, with debt as % of equity of 1.5% vs 4.2% for Salesforce.com. Adobe has more cash cushion, with cash as % of assets of 24% vs 11% for Salesforce.com.
The Net of It All
While Adobe’s trailing revenue multiple stands higher than that of Salesforce.com, it has seen good growth in revenues over the last three years and an improvement in operating margins compared to Salesforce.com in the same period. Looking at the post-Covid recovery, overall Adobe has fared better than Salesforce. Over the last twelve months Salesforce.com revenue growth was at 23% while Adobe’s revenue was similar at 22%, but Adobe’s margin was a much higher 36.5% compared to 4.4% for Salesforce.com in the same period. Further, Adobe’s P/E ratio of 46.5x is significantly cheaper than Salesforce.com’s 114.6x, despite a higher P/S ratio of 18x vs Salesforce.com’s 11.4x. Hence, we believe Adobe has the potential to keep driving ahead, supported by strong financials and the gap in valuation could further widen over time. As such, we believe that Adobe is currently a better buying opportunity compared to salesforce.com stock.
While ADBE stock may move higher in the near term, there are several peers in the sector that look like a Better Bet Than ADBE Stock. Also, Adobe Peer Comparisons summarizes how the company fares against peers on metrics that matter.