Experiencing a 22% decline, Adobe might emulate Salesforce's strategies to transform into a compelling buy opportunity by 2025.
As the year draws to a close, the tech sector is poised to outperform the S&P 500 (1.26%) primarily due to gains in industries like semiconductors, with companies like Nvidia and Broadcom leading the charge. However, the software industry has had mixed results, with companies such as Salesforce outperforming the market, while others like Microsoft and Adobe lag behind. Specifically, Adobe has underperformed, dropping over 22% year to date.
Let's discuss why Salesforce is excelling, why Adobe is struggling, and whether either is a worthy investment at present.
Diverging paths
Not long ago, Salesforce and Adobe were in a similar predicament, facing investor doubt over the return on investment in artificial intelligence (AI). However, Salesforce has seen a significant surge in recent months while Adobe approaches its 52-week low.
Salesforce has distinguished itself in the enterprise software space by capitalizing on its compelling AI opportunity. This opportunity is referred to as AI agents, which utilize machine learning and natural language processing to tackle issues, answer questions, and make decisions. Salesforce's platform, Agentforce, allows organizations to customize and build various AI agents.
During its third-quarter fiscal 2025 earnings call, Salesforce mentioned the word "agent" a substantial 136 times. While frequent emphasis on a new product or service may raise flags about management overpromising, investors seem to believe Agentforce could have substantial potential.
Agentforce represents Salesforce's most significant innovation in years and provides a clear avenue for generating high-margin revenue immediately. Launched in October, this service is usage-based and costs $2 per conversation. Based on CEO Marc Benioff's goal of having 1 billion AI agents by the end of fiscal 2026, Agentforce could generate a $2 billion opportunity for Salesforce. For reference, Salesforce expects to reach around $38 billion in revenue in fiscal 2025.
If Agentforce proves successful, it could accelerate growth and set Salesforce apart in the enterprise software sector, which comprises Salesforce, Slack, Tableau, and others. However, Salesforce's revenue growth is projected to be around 8-9% in fiscal 2025 compared to fiscal 2024.
In conclusion, Salesforce may be growing at a moderate pace, but its AI-driven growth narrative is enticing for long-term investors.
Adobe investors remain wary of AI potential
Adobe recently reported its fiscal fourth-quarter and full-year fiscal 2024 results, posting a 10.8% year-over-year revenue increase during the November 29 period. The company projects an accelerated 14.2% revenue growth in fiscal 2025 and non-GAAP (adjusted) earnings-per-share growth of 10.5%. Despite these numbers, Adobe's stock price saw a drop of over 13% after reporting earnings.
Despite similar near-term growth rates, investors are showing favoritism towards Salesforce and displaying skepticism towards Adobe's ability to effectively monetize AI.
Although Adobe has developed numerous AI-enhanced product upgrades and recorded a record year of high-margin growth, it has yet to deliver a breakthrough announcement that rivals Agentforce.
Salesforce and Adobe: Two growth stocks worthy of investigation
The recent rally in Salesforce stock highlights investor appeal for AI-driven enterprise software solutions, while the disappointment in Adobe indicates investor impatience with companies that lack a clear vision for monetizing AI. As an individual investor, it's essential to filter out short-term market noise and evaluate whether a company has a path to future growth and if the valuation is reasonable.
Salesforce has experienced impressive growth, but the likelihood of Agentforce's success could make the stock an attractive buy even now. However, some investors may prefer to wait and see if Salesforce can meet its targets before throwing their support behind the stock.
Conversely, the steep decline in Adobe's stock price may be an overreaction. Adobe's mid-range non-GAAP fiscal 2025 earnings forecast, $20.35 per share, equates to a forward price-to-earnings ratio of just 22.5. This is a bargain for an industry-leading, high-margin cash cow with solid revenue growth prospects for the year ahead.
- Considering Salesforce's successful implementation of its AI-driven product, Agentforce, some investors might be interested in investing more money into the company due to its potential to generate high-margin revenue and set Salesforce apart in the enterprise software sector.
- On the other hand, despite Adobe's strong revenue growth and high-margin products, its stock price has seen a significant decrease after reporting earnings, which might be an opportunity for investors who believe in its ability to effectively monetize AI and are willing to invest at a lower price-to-earnings ratio.
