In this article, I evaluated two software stocks, Adobe Inc. (ADBE) and Microsoft Corporation (MSFT), to determine which software stock is set to make the most gains in 2024. We believe ADBE is the better investment for reasons explained throughout this piece.
Mobile and web applications are essential for corporate and consumer communication, entertainment, e-commerce, productivity, and more. Software developers increasingly creating and delivering cutting-edge, streamlined mobile and web apps will fuel the expansion of the software market. The global software market is poised to grow at a CAGR of 11.7% by 2032.
Additionally, given the increasing integration of generative AI in the development of software applications, the revenue in the global application development software market is forecasted to reach $179.90 billion by 2024 and increase further to $234.70 billion by 2028, witnessing a CAGR of 6.9% from 2024 to 2028.
Moreover, Gartner (IT) predicts a 12.7% yearly increase in global software spending, reaching $1.03 trillion by 2024, while worldwide total IT spending is anticipated to grow 6.8% year-over-year to $5 trillion. This underscores software's pivotal role in propelling and magnifying technological advancements across the industry.
The software industry’s bright growth prospects should benefit ADBE and MSFT significantly.
ADBE plunged marginally over the past nine months compared to MSFT’s 25.8% gain. In addition, ADBE gained 27% over the past year, while MSFT surged 49.7%.
However, here are the reasons why we think ADBE could perform better in the near term:
Latest Developments
On March 7, 2024, ADBE launched the Adobe Express mobile app beta for Android and iOS, featuring revolutionary Adobe Firefly generative AI and enhanced mobile editing functionalities. Leveraging ADBE’s renowned imaging, video, and design expertise, the app will enable the swift transformation of creative concepts into compelling content while on the move.
The new release underscores ADBE’s commitment to innovation, empowering individuals to craft standout content effortlessly and strengthening its position as a leader in digital creativity solutions.
On April 8, 2024, MSFT and Cloud Software Group, Inc. announced deepening their collaboration through an eight-year strategic partnership agreement. The collaboration will strengthen the go-to-market collaboration for the Citrix virtual application and desktop platform and support the development of new cloud and AI solutions with an integrated product roadmap.
Recent Financial Results
During the first quarter, which ended March 1, 2024, ADBE’s total revenue increased 11.2% year-over-year to $5.18 billion. Its gross profit rose 12.2% from the year-ago value to $4.59 billion. Moreover, the company’s non-GAAP net income and non-GAAP net income per share grew 17.1% and 17.9% year-over-year to $2.05 billion and $4.48, respectively.
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 the year-ago value to $27.03 billion.
However, the company’s cash outflow from investing activities grew 905.9% from the prior year’s period to $71.93 billion. As of December 31, 2023, MSFT’s cash and cash equivalents amounted to $17.31 billion, down from $34.70 billion as of June 30, 2023.
Past And Expected Financial Performance
ADBE’s revenue and EBITDA rose at respective CAGRs of 13.4% and 12.5% over the past three years. Its EBIT increased at CAGRs of 4.9% and 13.6%, respectively. Additionally, the company’s total assets improved at a CAGR of 4.8% over the same time frame.
For the second quarter ending May 2024, ADBE’s revenue and EPS are expected to grow 9.9% and 12.3% year-over-year to $5.29 billion and $4.39, respectively. Analysts expect the company’s revenue and EPS for the fiscal year ending November 2024 to increase 10.6% and 12.1% from the prior year to $21.24 billion and $18.01, respectively.
Over the past three years, MSFT’s revenue and EBITDA increased at CAGRs of 14.1% and 18.1%, respectively. Its net income and EPS grew at respective CAGRs of 17.2% and 18.1% over the period. Moreover, the company’s total assets rose at a CAGR of 15.7% over the same time frame.
Analysts expect MSFT’s revenue for the fiscal year (ending June 2024) to increase 15.3% year-over-year to $244.38 billion. Likewise, its EPS for the ongoing year is expected to grow 19.3% from the previous year to $11.70.
Profitability
MSFT’s trailing-12-month revenue is 11.4 times what ADBE generates. However, ADBE is more profitable, with a trailing-12-month gross profit margin of 88.08% compared to MSFT’s 69.81%. Similarly, ADBE’s trailing-12-month levered FCF margin of 33.76% compares with MSFT’s 25.78%.
Additionally, ADBE’s trailing-12-month ROTC of 23% compares with MSFT’s 20.77%.
Valuation
In terms of trailing-12-month non-GAAP P/E, ADBE is trading at 28.95x, 24.7% lower than MSFT’s 38.47x. Moreover, ADBE’s trailing-12-month Price/Sales of 11.09x is 20.2% lower than MSFT’s 13.90x. Furthermore, ADBE’s trailing-12-month EV/Sales of 10.76x compared with MSFT’s 14.03x.
Thus, ADBE is more affordable.
POWR Ratings
ADBE has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. Conversely, MSFT has an overall rating of C, translating to a Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. ADBE has an A grade in Quality. Its trailing-12-month gross profit margin and trailing-12-month asset turnover ratio of 88.08% and 0.72x are 81.9% and 16.3% higher than the industry averages of 48.43% and 0.62x.
On the other hand, MSFT has a C grade in Quality. The stock’s trailing-12-month gross margin of 69.81% is 44.2% higher than the 48.43% industry average. However, the stock’s trailing-12-month asset turnover ratio of 0.55x is 11.9% lower than the industry average of 0.62x.
Of the 132 stocks in the Software - Application industry, ADBE is ranked #29, while MSFT is ranked #20.
Beyond what we’ve stated above, we have also rated both stocks for Stability, Growth, Momentum, Sentiment, and Value. Click here to view ADBE Ratings. Get all MSFT ratings here.
The Winner
A surge in the volume of enterprise data, rising automation of business processes, and growing digital transformation worldwide are expected to drive robust growth and expansion in the software industry. Moreover, enterprises in various sectors leverage autonomous innovations to enhance their services and products, propelling market growth.
Thus, software stocks ADBE and MSFT are expected to benefit considerably from the industry’s tailwinds. However, MSFT’s low profitability, limited growth, and higher valuation make its rival, ADBE, the better buy now.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated software stocks here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
ADBE shares were trading at $485.75 per share on Monday morning, up $0.63 (+0.13%). Year-to-date, ADBE has declined -18.58%, versus a 9.70% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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