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Finance

Which Stock is a Better Pick for 2021?

Microsoft Corporation (MSFT) and Adobe Inc. (ADBE) are two of the world’s biggest tech companies. They have continued to prove their worth and resilience despite a steep fall-off in the broader market amid the coronavirus pandemic. As organizations shift to work-from-home arrangements, the demand for their next-generation collaboration and productivity tools are expected to grow steadily.

Despite growing concerns over a record number of new coronavirus infections in the U.S.,  the stock market has largely held steady thanks to the surging shares of big software companies. Increased corporate spending on cloud computing, digital transformation, and artificial intelligence have been the primary drivers of revenue growth for leading software stocks like MSFT and ADBE. There’s still significant upside for these two stocks this year because  the digital user base is expected to keep increasing.

While MSFT has returned 31.4% over the past year, ADBE gained 34.4%. In terms of past-six-month performance, ADBE is the clear winner with 6.8% returns versus MSFT’s 2.2%. But which of these stocks is a better pick now? Let’s find out.

Latest Movements

On January 11, MSFT announced a multi-year partnership with Broad Institute of MIT, Harvard, and Verily to accelerate new innovations in biomedicine through the Terra platform. This should allow MSFT to make ground-breaking progress by bringing together its cloud, data, and AI technologies to accelerate the development of global biomedical research.

On December 10, MSFT and Deutsche Telekom Group announced a seven-year strategic partnership to help customers accelerate digitalization and enhance productivity. The company has also recently collaborated with Johnson Controls to digitally transform how buildings and spaces are conceived, built, and managed. This will enable MSFT to accelerate innovation and deliver high-quality services based on customer demands.

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And on December 8, ADBE announced the completion of its acquisition of Workfront, a leading work management platform for marketers with more than 3,000 customers and one million users. This acquisition should enable ADBE to satisfy the increasing expectations of its B2B and B2C customers using the agile platform of Workfront.

Earlier last year, ADBE and Microsoft Corp. (MSFT) launched C3 AI CRM, powered by Microsoft Dynamics 365, to provide AI-first customer relationship management solutions to industries. This will enable ADBE to drive its business growth and customer-facing operations with predictive business insights.

Recent Financial Results

In the fiscal first quarter ended September 30, 2020 MSFT’s revenue surged 12% year-over-year to $37.20 billion, due primarily  to a rise in intelligent cloud services revenue. The company’s EPS grew 31.9% year-over-year to $1.82.

MSFT’s Office Commercial products and cloud services revenue increased 9%, driven by Office 365 Commercial revenue growth. The company’s operating income rose 25% from the year-ago value to $15.90 billion. Moreover, it saw a 19% rise in its dynamics products and cloud services revenue driven by Dynamics 365 revenue growth of 38%.

ADBE’s revenue for the fiscal fourth quarter ended November 27, 2020, increased 14% year-over-year to $3.42 billion. The company’s digital media segment revenue was $2.50 billion, which represents 20 % year-over-year growth. Its gross profit grew 17.9% from the year-ago value to $2.99 billion, while its EPS rose 166.5% year-over-year to $4.69 over this period.

Past and Expected Financial Performance

MSFT’s revenue and total assets grew at a CAGR of 14% and 6.5%, respectively, over the past three  years. The company’s EBITDA grew at a CAGR of 18.4% over this period.

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Analysts expect the company’s revenue to increase 8.9% in the current quarter, 10.7% in the current year, and 10.9% next year. MSFT’s EPS is expected to grow 8.6% in the current quarter, 17.4% in the current year and 10.5% next year. Moreover, its EPS is expected to grow at a rate of 14.6% per annum over the next five years.

In comparison,  ADBE’s revenue and total assets grew at a CAGR of 20.8% and 18.7%, respectively, over the past three years. The CAGR of the company’s EBITDA has been 26%.

Analysts expect the company’s revenue to increase 62.9% in the current quarter, 18.1% in the current year and 14.4% next year. The company’s EPS is expected to grow 22.5% in the current quarter, 11.1% in the current year and 17.9% next year. ADBE’s EPS is expected to grow at a rate of 16.7% per annum over the next five years.

Profitability      

MSFT’s trailing-12-month revenue is more than 11 times ADBE’s. But ADBE is more profitable with a gross profit margin of 86.6% versus MSFT’s 68.3%.

However, MSFT’s EBITDA margin of 46.3% compares favorably with ADBE’s 38.8%.

Valuation

In terms of trailing-12-month P/E, ADBE is currently trading at 45.87x, 33.3% more expensive than MSFT which is currently trading at 34.41x. Its trailing-12-month Price/Sales of 17.32x is 57.6% higher than MSFT’s 10.99x.

Thus, MSFT is the more affordable stock here.

POWR Ratings

While MSFT is rated “Buy” in our proprietary POWR Ratings system, ADBE is rated “Neutral.” Here are how the four components of overall POWR Rating are graded for MSFT and ADBE:

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MSFT has an “A” for Trade Grade, a “B” for Buy & Hold Grade and Industry Rank, and a “C” for Peer Grade. In the 115-stock Software – Application industry, it is ranked #33.

ADBE has a “B” for Buy & Hold Grade and Industry Rank, a “C” for Trade Grade, and a “D” for Peer Grade. It is ranked #60 out of 115 stocks in the same industry.

The Winner

While both MSFT and ADBE are good investment bets considering the factors discussed here, MSFT appears to be a better choice because it is a cheaper investment option to benefit from the industry’s growth.

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NVDA shares were trading at $521.55 per share on Friday afternoon, down $6.46 (-1.22%). Year-to-date, NVDA has declined -0.12%, versus a 0.81% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More…

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