Microsoft Corporation (MSFT) in Redmond, Wash., and Adobe Inc. (ADBE) in San Juan, Calif., are two of the biggest technology companies in the world. Thanks to extended remote lifestyles and continuing digitization, these companies continue to capitalize on the growing demand for software solutions.
Since the beginning of this year, tech stocks have suffered a massive sell-off due to concerns over the Fed's aggressive monetary policy tightening to control soaring inflation and geopolitical uncertainties surrounding the Ukraine-Russia war. However, rapid digitization and the adoption of advanced technologies across various industries should help the sector rebound quickly. According to Gartner, Software spending is expected to grow 9.8% to $674.9 billion in 2022.
MSFT has slumped 5.3% in price over the past month, and ADBE is down 2.5% over the past month. However, MSFT is the clear winner with 3.5% returns versus ADBE’s negative returns in terms of the past year’s performance.
Click here to check out our Software Industry Report for 2022
But which stock is a better buy now? Let's find out.
Latest Developments:
This month, American Airlines and MSFT announced a partnership to enable better use of technology to create better, more connected experiences for customers and American Airlines team members. Under this partnership, American will use Microsoft Azure as its preferred cloud platform for its airline applications and key workloads, significantly increasing its digital transformation and making Microsoft one of the airline's largest technology partners.
Also, this month, MSFT announced the general availability of a stand-alone version of Microsoft Defender for Business. Defender for Business brings enterprise-grade endpoint security to SMBs, including endpoint detection and response capabilities to protect against ransomware and other sophisticated cyber threats.
In March, ADBE announced that BMW Group (BMWYY), one of the world's leading automobile and motorcycle manufacturers, had augmented its relationship with ADBE for the digital transformation of its sales and marketing division. BMW Group, which includes BMW, Rolls-Royce, MINI, and, is leveraging Adobe Experience Cloud to give personalized digital experiences as it focuses on the goal of selling a quarter of all its vehicles online within the next three years.
Recent Financial Results
During the third quarter, ended March 31, 2022, MSFT's total revenue increased 18.4% year-over-year to $49.36 billion. Its operating income grew 19.5% from its year-ago value to $20.36 billion, while its net income improved 8.2% from its prior-year quarter to $16.73 billion. The company's EPS rose 9.4% year-over-year to $2.22.
ADBE's total revenue increased 9.1% year-over-year to $3.96 billion for the first quarter, ended March 4, 2022. Its operating income increased 8.7% from its year-ago value to $1.58 billion. Its net income improved marginally from its prior-year quarter to $1.27 billion.
However, its total operating expenses increased 8.3% from the year-ago value to $2.17 billion. Its cash and cash equivalents declined 28.7% for the three months ended March 04, 2022, to $2.74 billion. Also, its net cash provided by operating activities declined marginally to $1.77 billion.
Past and Expected Financial Performance
MSFT's revenue and EPS have grown at CAGRs of 16.4% and 28.6%, respectively, over the past three years. Analysts expect MSFT's revenue to increase 14.6% in the current quarter, 18.5% in the current year, and 14.4% next year. The company's EPS is expected to grow 7.4% in the current quarter, 15.8% in the current year, and 15.6% next year. Furthermore, its EPS is expected to grow at a 16.2% rate per annum over the next five years.
In comparison, ADBE's revenue and EPS have grown at CAGRs of 19.1% and 23.2%, respectively, over the past three years. Analysts expect the company's revenue to increase 13.1% in the current year and 14.7% next year. The company's EPS is expected to grow 9.2% in the current quarter, 9.4% in the current year, and 17.9% next year. And ADBE's EPS is expected to grow at a 14.3% rate per annum over the next five years.
Profitability
MSFT's trailing-12-month revenue is 11.9 times what ADBE generates. However, ADBE is more profitable, with an 88% gross profit margin compared to MSFT's 68.7%. However, MSFT’s 37.6% net income margin compares to ADBE's 29.9%.
Furthermore, MSFT’s 48.7%, 15.7% and 22.4% respective ROE, ROA and ROTC compare with ADBE’s 35.3%, 14.5% and 20.2%.
Thus, MSFT is more profitable.
Valuation
In terms of forward EV/Sales, ADBE is currently trading at 10.55x, which is 12.8% higher than MSFT, which is currently trading at 9.35x. Also, ADBE'S 10.76x forward EV/Sales ratio is 11.9% higher than MSFT's 9.62x.
POWR Ratings
MSFT has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. ADBE, on the other hand, has an overall C rating, which translates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
MSFT has a B grade for stability, which is in sync with the company's 0.94 beta. ADBE, in contrast, has a C grade for Stability. This is justified given the stock’s 1.09 beta.
Among the 57 stocks in the Software - Business industry, MSFT is ranked #13 while ADBE is ranked #37 out of 156 stocks in the Software - Application industry.
Beyond what we've stated above, we have also rated both the stocks for Growth, Momentum, Value, and Sentiment. Click here to view ADBE ratings. Get all MSFT ratings here.
Click here to check out our Software Industry Report for 2022
The Winner
Continuing remote and hybrid working trends coupled with rapid digitization across various industries should drive the software industry’s growth. Therefore, MSFT and ADBE are expected to grow substantially. However, MSFT’s relatively lower valuation and higher profitability we think make it a better bet now.
Our research shows that odds of success increase when one invests in stocks with an overall Rating of Strong Buy or Buy. Click here to access the top-rated stocks in the Software - Business industry and here for those in the Software - Application industry.
Note that MSFT is one of the few stocks handpicked currently in the Reitmeister Total Return portfolio. Learn more here.
MSFT shares were trading at $263.49 per share on Wednesday afternoon, up $3.87 (+1.49%). Year-to-date, MSFT has declined -21.31%, versus a -16.09% rise in the benchmark S&P 500 index during the same period.
About the Author: Spandan Khandelwal
Spandan's is a financial journalist and investment analyst focused on the stock market. With her ability to interpret financial data, she aims to help investors evaluate the fundamentals of a company before investing.
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