Is Salesforce a Top Cloud Stock to Buy for 2024?

For much of the last decade, Salesforce (CRM -0.05%) co-founder and CEO Marc Benioff has been talking about becoming "one of the largest enterprise software companies in the world." Mission success. Salesforce is No. 3, behind much-older industry titans Microsoft and Oracle.

Salesforce's rapid growth, spurred on by a seemingly endless string of acquisitions, served its purpose for the time. The cloud software movement that Salesforce pioneered was white-hot in the 2010s. A never-ending line of start-ups fueled by venture capital money struck out to lay claim to the growing industry, and Salesforce purchased its fair share of them to bolster its status as a platform and to stave off future competition.

But times change. The software boom is over for now, and investors are demanding better profit margins rather than all-out growth. Salesforce has successfully made the pivot. After rallying 90% through the first 11 months of 2023, is the stock still a buy for 2024?

For fiscal 2024 (the 12-month period ending in January 2024), Salesforce is on track to reach about $34.8 billion in revenue. That's just an 11% year-over-year increase, far lower than the 20%-plus pace longtime shareholders have been accustomed to.

Growth is growth, though, and it's not surprising to see Salesforce's exponential rise taper off now that it's of such immense size. After all, 2023 has marked a general cooldown for the cloud software market overall, so a titan like Salesforce certainly isn't going to be immune. Time will tell if Benioff and company can reaccelerate their top-line trajectory next year (fiscal 2025, which corresponds to calendar year 2024).

Data by YCharts.

But of far more importance at this point is better operational excellence. Software is a high-profit business, but especially in the last couple of years, the long run of free cash flow generation took a breather. Net income, based on generally accepted accounting principles (GAAP), also faltered. That was largely due to all those acquisitions, culminating in the big purchase of Slack in 2021 -- on record as one of the largest software deals ever.

But Salesforce has successfully reignited free cash flow growth, and GAAP profitability is making a big comeback too. In Q3, operating margin came in at 17%, well ahead of management's guidance and a massive improvement from just under 6% the same period last year.

Data by YCharts.

There is still work to do at Salesforce in this new era of operational efficiency. One of the primary discrepancies between GAAP profits and free cash flow, for example, is employee stock-based compensation (SBC). SBC was $2.11 billion through the first nine months of this year, down a bit from the $2.47 billion the same period last year.

However, at just over 8% of total revenue, SBC is still elevated for a company of this size. If Salesforce wants to really ratchet up its profit margins, this metric will need to come down further.

Nevertheless, Benioff and the top team say they are committed to offsetting this shareholder dilution from SBC. Stock repurchases to date were $5.9 billion, more than offsetting SBC, and there's still another $10 billion left under the current buyback authorization.

It's nevertheless a good start for the more "shareholder-friendly" Salesforce as it flips from a young growth business to a mature tech giant. If the current trend continues, 2024 could be another big year of more moderate revenue growth but dramatic profit expansion.

The stock currently trades for 28 times trailing-12-month free cash flow. That looks like a reasonable price to me, especially assuming profit growth can average a low-to mid-teens percentage growth rate in the coming years. Even if the cloud software market continues at a similar pace as it has these past two years during economic turmoil, Salesforce looks like a top long-term buy.

Nicholas Rossolillo and his clients have positions in Salesforce. The Motley Fool has positions in and recommends Microsoft, Oracle, and Salesforce. The Motley Fool has a disclosure policy.

Better Cloud Stock: Adobe vs. Salesforce

Adobe (ADBE -0.43%) and Salesforce (CRM -0.05%) are two of the world's largest cloud software companies. Adobe transformed its desktop-based media software into cloud-based services over the past decade, while Salesforce owns the world's leading cloud-based customer relationship management (CRM) platform. Both companies also provide additional sales, marketing, e-commerce, and analytics services.

Adobe and Salesforce both reached their all-time highs during the apex of the growth stock rally in November 2021. But both stocks have pulled back over the following two years as rising interest rates drove investors toward more conservative investments. Should you invest in either of these cloud giants before the market heats up again?

Image source: Getty Images.

Adobe's revenue grew at a compound annual growth rate (CAGR) of 19% from fiscal 2017 to fiscal 2022 (which ended on Dec. 2, 2022). But in fiscal 2023, its revenue only rose 10%, and it expects just 10%-11% growth in fiscal 2024.

Adobe's Digital Media segment, which accounted for 73% of its revenue in fiscal 2023, is still growing at a steady rate as it locks media professionals into its sticky subscriptions. But its enterprise-facing Digital Experience segment, which accounted for 25% of its revenue, faced tougher macro headwinds over the past year. Currency headwinds also reduced its reported revenue growth by three percentage points for the full year.

Adobe's slower growth disappointed investors, who had expected its new generative AI tools -- which can be used to create AI images, photos, and 3D models, as well as accelerate other enterprise tasks -- to boost its near-term sales.

Adobe's operating margins are still rising and its adjusted EPS grew 17% in fiscal 2023, but it expects just 10%-12% growth in fiscal 2024. It also recently warned it could incur "significant monetary costs" to settle a Federal Trade Commission (FTC) probe into the cancellation policies for its subscriptions, and its $20 billion acquisition of Figma remains in limbo due to antitrust challenges. Adobe's EPS outlook for fiscal 2024 doesn't account for either of those unpredictable factors.

That combination of slowing growth and regulatory headwinds spooked the bulls, who had rushed back to Adobe amid the buying frenzy in AI stocks. Even after its post-earnings decline, it still doesn't look cheap at 33 times forward earnings.

Salesforce's revenue rose at a CAGR of 26% from fiscal 2017 to fiscal 2022 (which ended on Jan. 31, 2022). But its revenue only increased 18% in fiscal 2023, and it expects just 11% growth in fiscal 2024.

Salesforce faces many of the same challenges as Adobe. The macro headwinds made it difficult to lock bigger customers into longer contracts, while the currency headwinds reduced its reported revenue by four percentage points in fiscal 2023.

Salesforce has also been expanding its AI ecosystem to analyze its customer data more efficiently and accelerate certain tasks. But those new services aren't moving the needle on their own yet -- and Salesforce still faces stiff competition from Microsoft, Oracle, and other tech giants in the CRM market.

Over the past year, the stabilizing growth of Salesforce's platform and other business (which houses Lightning and Slack) and the accelerating growth of its data cloud (which includes Mulesoft and Tableau) offset the slower growth of its sales cloud, service cloud, and marketing & commerce cloud businesses. But those three weaker businesses -- which together accounted for 65% of its revenue in the first nine months of fiscal 2024 -- could recover as the macro environment improves.

Activist investors besieged Salesforce throughout the first half of calendar 2023, but they backed off as it significantly boosted its operating margins and earnings by laying off 10% of its workforce and reining in its spending. Its adjusted EPS only rose 10% in fiscal 2023, but it expects an acceleration to 56% growth in fiscal 2024.

Salesforce's stock looks cheap at 29 times next year's earnings, but the bears warn that its prioritization of profitability over sales growth could narrow its competitive moat in the crowded cloud software market.

I'm not a big fan of either stock right now because the flaws are easy to spot. But if I had to choose one over the other, I'd pick Salesforce. Its profit growth is accelerating, its stock is cheaper, and it doesn't face any regulatory challenges.

Leo Sun has positions in Adobe. The Motley Fool has positions in and recommends Adobe, Microsoft, Oracle, and Salesforce. The Motley Fool recommends the following options: long January 2024 $420 calls on Adobe and short January 2024 $430 calls on Adobe. The Motley Fool has a disclosure policy.

Better Cloud Stock: Adobe vs. Salesforce

network-cloud-connections

Adobe (NASDAQ: ADBE) and Salesforce (NYSE: CRM) are two of the world's largest cloud software companies. Adobe transformed its desktop-based media software into cloud-based services over the past decade, while Salesforce owns the world's leading cloud-based customer relationship management (CRM) platform. Both companies also provide additional sales, marketing, e-commerce, and analytics services.

Adobe and Salesforce both reached their all-time highs during the apex of the growth stock rally in November 2021. But both stocks have pulled back over the following two years as rising interest rates drove investors toward more conservative investments. Should you invest in either of these cloud giants before the market heats up again?

Image source: Getty Images.

Adobe's revenue grew at a compound annual growth rate (CAGR) of 19% from fiscal 2017 to fiscal 2022 (which ended on Dec. 2, 2022). But in fiscal 2023, its revenue only rose 10%, and it expects just 10%-11% growth in fiscal 2024.

Adobe's Digital Media segment, which accounted for 73% of its revenue in fiscal 2023, is still growing at a steady rate as it locks media professionals into its sticky subscriptions. But its enterprise-facing Digital Experience segment, which accounted for 25% of its revenue, faced tougher macro headwinds over the past year. Currency headwinds also reduced its reported revenue growth by three percentage points for the full year.

Adobe's slower growth disappointed investors, who had expected its new generative AI tools -- which can be used to create AI images, photos, and 3D models, as well as accelerate other enterprise tasks -- to boost its near-term sales.

Adobe's operating margins are still rising and its adjusted EPS grew 17% in fiscal 2023, but it expects just 10%-12% growth in fiscal 2024. It also recently warned it could incur "significant monetary costs" to settle a Federal Trade Commission (FTC) probe into the cancellation policies for its subscriptions, and its $20 billion acquisition of Figma remains in limbo due to antitrust challenges. Adobe's EPS outlook for fiscal 2024 doesn't account for either of those unpredictable factors.

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That combination of slowing growth and regulatory headwinds spooked the bulls, who had rushed back to Adobe amid the buying frenzy in AI stocks. Even after its post-earnings decline, it still doesn't look cheap at 33 times forward earnings.

Salesforce's revenue rose at a CAGR of 26% from fiscal 2017 to fiscal 2022 (which ended on Jan. 31, 2022). But its revenue only increased 18% in fiscal 2023, and it expects just 11% growth in fiscal 2024.

Salesforce faces many of the same challenges as Adobe. The macro headwinds made it difficult to lock bigger customers into longer contracts, while the currency headwinds reduced its reported revenue by four percentage points in fiscal 2023.

Salesforce has also been expanding its AI ecosystem to analyze its customer data more efficiently and accelerate certain tasks. But those new services aren't moving the needle on their own yet -- and Salesforce still faces stiff competition from Microsoft, Oracle, and other tech giants in the CRM market.

Over the past year, the stabilizing growth of Salesforce's platform and other business (which houses Lightning and Slack) and the accelerating growth of its data cloud (which includes Mulesoft and Tableau) offset the slower growth of its sales cloud, service cloud, and marketing & commerce cloud businesses. But those three weaker businesses -- which together accounted for 65% of its revenue in the first nine months of fiscal 2024 -- could recover as the macro environment improves.

Activist investors besieged Salesforce throughout the first half of calendar 2023, but they backed off as it significantly boosted its operating margins and earnings by laying off 10% of its workforce and reining in its spending. Its adjusted EPS only rose 10% in fiscal 2023, but it expects an acceleration to 56% growth in fiscal 2024.

Salesforce's stock looks cheap at 29 times next year's earnings, but the bears warn that its prioritization of profitability over sales growth could narrow its competitive moat in the crowded cloud software market.

I'm not a big fan of either stock right now because the flaws are easy to spot. But if I had to choose one over the other, I'd pick Salesforce. Its profit growth is accelerating, its stock is cheaper, and it doesn't face any regulatory challenges.

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Leo Sun has positions in Adobe. The Motley Fool has positions in and recommends Adobe, Microsoft, Oracle, and Salesforce. The Motley Fool recommends the following options: long January 2024 $420 calls on Adobe and short January 2024 $430 calls on Adobe. The Motley Fool has a disclosure policy.

Better Cloud Stock: Adobe vs. Salesforce was originally published by The Motley Fool