The continuation of hybrid working and ongoing digital transformation have been helping the software industry see relentless growth. Moreover, the growing demand for advanced software products and services in almost every sector should support the software industry’s growth in the upcoming months. According to Grand View Research, the global business software and services market is expected to grow at a CAGR of 11.3% by 2028.
Tech giant Microsoft Corporation (MSFT) develops, licenses, and supports software, services, devices, and solutions worldwide. Its offerings range from Microsoft Teams, Office 365 Security, and Compliance to Xbox hardware and Xbox content and services in the gaming segment. On the other hand, Salesforce.com Inc. (CRM) is engaged in developing enterprise cloud computing solutions focused on customer relationship management. The company offers Sales Cloud to store data, monitor leads and progress, and forecast opportunities.
MSFT has gained 26% in the past year and CRM has lost 3%. Which of these two stocks is a better buy now?
Latest Developments
On January 18, 2022, MSFT announced plans to acquire troubled video game company Activision Blizzard Inc. (ATVI). This acquisition will accelerate MSFT's gaming business growth across mobile, PC, console, and cloud and provide building blocks for the metaverse.
On January 13, 2022, CRM announced a series of innovations and partnerships to power the future of commerce, enabling companies to modernize their systems, develop more flexible digital strategies, and connect with their customers wherever they are. These innovations and partnerships bring together the power and flexibility of CRM's platform with an expansive ecosystem.
Recent Financial Results
MSFT’s total revenue increased 20% year-over-year to $51.70 billion for the fiscal second quarter ended December 31, 2021. The company’s operating income grew 24% year-over-year to $22.20 billion, while its net income came in at $18.80 billion representing a 21% year-over-year increase. Also, its EPS came in at $2.48, up 22% year-over-year.
CRM’s revenue increased 27% year-over-year to $6.86 billion for the fiscal third quarter ended October 31, 2021. However, its income from operations declined 83% year-over-year to $38 million, while its net income came in at $468 million representing a 56.7% year-over-year decrease. Also, its EPS came in at $0.47, down 59.1% year-over-year.
Past and Expected Financial Performance
MSFT’s revenue and EPS grew at CAGRs of 16% and 29.6%, respectively, over the past three years. Analysts expect MSFT’s revenue to increase 18.4% in the current year and 14.1% next year. The company’s EPS is expected to grow 16.1% in the current year and 15% next year. Moreover, its EPS is expected to grow at 17.4% per annum over the next five years.
On the other hand, CRM’s revenue and EPS grew at CAGRs of 25.8% and 13.4%, respectively, over the past three years. The company’s revenue is expected to increase 24.2% in the current year and 20.4% next year. Its EPS is expected to decline 4.9% in the current year but grow 1.3% next year. Also, CRM’s EPS is expected to grow at 12% per annum over the next five years.
Profitability
MSFT’s trailing-12-month revenue is 7.40 times what CRM generates. MSFT is also relatively more profitable with an EBITDA margin and net income margin of 49.12% and 38.50% compared to CRM’s 13.63% and 6.96%, respectively
Furthermore, MSFT’s ROE, ROA, and ROTC of 49.05%, 15.25%, and 21.68% are higher than CRM’s 3.57%, 0.83%, and 1.03%, respectively.
Valuation
In terms of forward non-GAAP P/E, CRM is currently trading at 49.09x, 45.8% higher than MSFT’s 33.66x. Moreover, CRM’s forward non-GAAP PEG ratio of 4.20x is 75% higher than MSFT’s 2.40x.
So, MSFT is relatively affordable here.
POWR Ratings
MSFT has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, CRM has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
MSFT has an A grade for Sentiment, consistent with analysts’ expectations that its EPS and revenue will increase in the upcoming months. On the other hand, CRM has a B grade for Sentiment.
MSFT also has a B grade for Stability, in sync with its beta of 0.89. In comparison, CRM has a C grade for Stability, consistent with its beta of 1.07.
Moreover, MSFT has a grade of B for Quality. This is justified given MSFT's 21.68% trailing-12-month ROTC, 334.1% higher than the industry average of 4.99%. On the other hand, CRM has a Quality grade of C, in sync with its 1.03% trailing-12-month ROTC, 79.4% lower than the industry average of 4.99%.
Of the 165 stocks in the Software - Application industry, MSFT is ranked #18. In comparison, CRM is ranked #46.
Beyond what I’ve stated above, we have also rated the stocks for Growth, Value, and Momentum. Click here to view all the MSFT ratings. Also, get all the CRM ratings here.
The Winner
With rising demand for advanced software solutions, the industry should witness solid growth this year and beyond. While both MSFT and CRM are expected to gain, it is better to bet on MSFT now because of its lower valuation, higher profitability, and better growth prospects.
Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Software - Application industry here.
MSFT shares were trading at $294.80 per share on Tuesday afternoon, down $3.99 (-1.34%). Year-to-date, MSFT has declined -12.16%, versus a -9.44% rise in the benchmark S&P 500 index during the same period.
About the Author: Nimesh Jaiswal
Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.
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