Driven by digitization and continuous technical advancements, the software industry is poised for significant expansion. In light of this, is it wise to invest in software stocks Microsoft Corporation (MSFT) and Adobe Inc. (ADBE) this month? Let's explore.
The software industry is poised for significant expansion as enterprises increasingly rely on software solutions. Technological progress is strengthening the sector, driving innovation, improving development processes and facilitating immersive and connected experiences.
With a favorable long-term perspective, investing in shares of Adobe Inc.ADBE) appears measured. Similarly, the monitoring of Microsoft Corporation (MSFT) in anticipation of solid returns can be useful. Before we dig into these highlighted stocks, let's analyze the industry dynamics.
Recent years have witnessed substantial transformative changes in the software industry driven by emerging technology trends. Edge computing, low-code development, and cybersecurity are leading a revolution, fundamentally changing the landscape of software development, deployment, and usage.
Artificial Intelligence (AI) and Machine Learning (ML) have transcended the realm of mere words, cementing their status as necessary components within software applications. These algorithms play key roles in predictive analytics, personalization, automation and augmentation of user experiences and decision-making processes.
Moreover, the industry will reap significant benefits as native cloud technologies progress, emphasizing readiness and improving IT management. The evolution is resulting in reduced complexity, increased scalability and increased cost effectiveness, giving organizations superior performance and flexibility in their software operations.
Global spending on public cloud services is projected to increase by 20.4% this yeardriven by a mix of price increases from cloud vendors and increased usage, mirroring trends seen in 2023.
Additionally, Gartner (IT) predicts an annual increase of 12.7%. in global software spending, poised to reach $1.03 trillion by 2024, outpacing the 6.8% increase in total IT spending expected to reach $5 trillion. This underscores the key role of software in driving and amplifying technological advances across the industry.
At the same time, Statista predicts that revenues in the software market will reach 698.80 billion by 2024. Additionally, according to a report by Grand View Research, the global application development software market is expected to expand a CAGR of 24.3%reaching $733.50 billion by 2028.
Against this backdrop, MSFT and ADBE are strategically positioned to take advantage of favorable industry conditions.
In terms of price performance, MSFT has risen 10.9% over the past three months, while ADBE has fallen 6.7% over the same period. However, MSFT rose 22.6% over the past nine months, closing the last trading session at $409.14, while ADBE rose 28.5% over the same period, closing the last trading session at $556.04.
But which software can be a better choice? Let's find out.
Recent developments
On January 15, MSFT and Vodafone revealed a 10-year strategic alliance which aims to strengthen digital infrastructure across Europe and Africa. Vodafone is committing $1.5 billion to co-create cloud and AI solutions with MSFT, improving services for over 300 million users.
MSFT will have access to Vodafone's connectivity services, enriching its ecosystem. Additionally, the company is planning to invest in Vodafone's IoT platform, which is poised to emerge as a standalone venture by April 2024. The move should attract fresh partnerships and customers, spurring application development and expanding connectivity. with different devices.
The collaboration promises exponential growth for MSFT by strengthening its market presence and advancing technological innovation.
On March 7, ADBE launched Adobe Express mobile app beta for Android and iOS, with Adobe Firefly's revolutionary generative AI and improved mobile editing functionalities. Leveraging ADBE's renowned image, video and design expertise, the app will enable the rapid transformation of creative concepts into compelling content on the go.
The release underscores ADBE's commitment to innovation, empowering individuals to create outstanding content effortlessly, thus strengthening its position as a leader in digital creativity solutions.
Latest financial results
In the second quarter of fiscal 2024, which ended December 31, 2023, MSFT's total revenue increased 17.6% year-over-year to $62.02 billion. Its operating income rose 32.5% from a year ago to $27.03 billion.
However, the company's cash outflows from investment activities rose 905.9% from the year-ago period to $71.93 billion. As of December 31, 2023, MSFT's cash and cash equivalents totaled $17.31 billion, up from $34.70 billion on June 30, 2023.
During the fourth quarter of fiscal 2023, which ended December 1, 2023, ADBE's total revenue increased 11.6% year-over-year to $5.05 billion. Its operating income rose 15.8% from a year ago to $1.74 billion.
Additionally, the company's cash flow from investing activities totaled $153 million, compared to a cash outflow of $69 million in the year-ago quarter. As of December 1, 2023, ADBE's cash and cash equivalents were $7.14 billion, up from $4.23 billion on December 2, 2022.
Past and expected financial performance
Over the past three years, MSFT's revenue and EBITDA grew at a CAGR of 14.1% and 18.1%, respectively. Its net income and EPS grew at respective CAGRs of 17.2% and 18.1% during the period. Additionally, the company's total assets grew at a CAGR of 15.7% during the same time frame.
For the fiscal year ending June 2024, analysts expect the company's revenue to grow 15.3% year over year to $244.38 billion. Likewise, its EPS for the coming year is expected to rise 19.3% from last year to $11.70.
Over the past three years, ADBE's revenue and EBITDA grew at a CAGR of 14.7% and 14.8%, respectively. Additionally, the company's net income and EPS grew at respective CAGRs of 1.1% and 3%. Moreover, its total assets grew at a CAGR of 7% during the same period.
The consensus revenue estimate of $21.50 billion for the fiscal year ending November 2024 reflects a 10.8% year-over-year increase. Furthermore, the company's EPS for the same period is expected to grow 11.5% from last year to $17.92.
profitability
MSFT's trailing 12-month earnings are 11.7 times higher than those generated by ADBE. However, ADBE is more profitable, with a trailing 12-month gross profit margin of 87.87% compared to MSFT's 69.81%. Similarly, ADBE's trailing 12-month FCF margin of 34.06% compares with MSFT's 25.78%. Additionally, ADBE's 12-month ROTC of 21.16% compares to MSFT's 20.77%.
ASSESSMENT
In terms of trailing 12-month non-GAAP P/E, ADBE is trading at 33.77x, 7.1% lower than MSFT's 36.36x. Furthermore, ADBE's trailing price/sales of 12.79x is 2.7% lower than MSFT's 13.14x. Furthermore, ADBE's 12-month EV/Sales is 12.47x compared to MSFT's 13.27xx.
Thus, ADBE is more affordable.
POWR Ratings
MSFT has an overall rating of C, which equates to Neutral in our ownership POWR Ratings the system. Conversely, ADBE has an overall rating of B, which translates to Buy. POWR ratings are calculated by considering 118 different factors, with each factor weighted to an optimal scale.
Our proprietary rating system also rates each stock based on eight different categories. MSFT has a grade of D for value, which corresponds to its higher rating than the industry. In terms of forward Price/Sales and forward non-GAAP PEG, the stock trades at 12.22x and 2.28x, 313.5% and 12.4% higher than the industry average of 2.96x and 2.03x, respectively.
On the other hand, ADBE has a C grade for value, which is in sync with its relatively lower rating. In terms of forward price/sales, the stock trades at 11.43x, 286.8% higher than the industry average of 2.96x. However, its forward non-GAAP PEG of 1.93x is 4.9% lower than the industry average of 2.03x.
Out of 44 shares in category B Software – Business industry, MSFT ranks #18. While, on the B scale Software – Application industry, ADBE ranks 28 out of 132 stocks.
Beyond what we've said above, we've also rated both stocks for Growth, Momentum, Stability, Sentiment and Quality. Click here to view MSFT ratings. Get all ADBE ratings here.
Winner
While MSFT and ADBE emerge as key players positioned to take advantage of software industry dynamics, ADBE's discounted valuation and better financial performance in its latest quarter may position it as a better investment option right now .
Our research shows that the chances of success increase when one invests in stocks with an overall rating of Strong Buy. You can view all the top rated stocks in the Software – Business industry. Click here to see all the top rated stocks in the Software – Applications industry.
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Shares of MSFT were flat in premarket trading on Friday. Year-to-date, MSFT has gained 9.00%, versus a gain of 8.31% in the benchmark S&P 500 over the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is adept at assessing the long-term prospects of stocks with her fundamental analysis skills. Its purpose is to help investors build portfolios with sustainable returns.
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