Enterprises are realizing the importance of cloud computing like never before. The rapid transition to the cloud helped organizations adopt remote working and ensured that businesses were not interrupted by the pandemic-induced restrictions. Several companies offering cloud-based applications and tools experienced strong demand last year and continue to see favorable trends as enterprises are now more aware of the benefits of the cloud.
Using the TipRanks Stock Comparison tool, we will place two cloud-based SaaS (Software as a Service) companies, Autodesk and Adobe, alongside each other and select the stock offering a more attractive investment opportunity.
Autodesk offers design software and services that are extensively used in the architecture, engineering and construction, manufacturing, digital media and entertainment industries. The company’s transition in recent years from a perpetual license revenue model to a cloud-based subscription model has worked in its favor and is expected to drive profitability over the long-term.
In 3Q FY21 (ended Oct.31), Autodesk experienced strong enterprise deal activity, improved subscription renewal rates, robust digital sales, and sequential improvement in new business trends. Third quarter subscription revenue increased 24% to $884 million and overall revenue was up 13% to $952 million despite demand softness in some regions. Also, adjusted EPS spiked 33.3% year-over-year to $1.04 as the operating margin expanded 300 basis points.
Diving into other key metrics, recurring revenue accounted for 97% of 3Q overall revenue and net revenue retention rate was within the 100%-110% range. Current RPO (Remaining Performance Obligation), which indicates the revenue expected to be recognized in the next twelve months, came in at $2.4 billion, reflecting a 16% rise. Overall, the company ended the quarter with a total RPO of $3.6 billion (up 21%).
Looking ahead, Autodesk predicts FY21 revenue growth of 15% (based on the mid-point of the guidance range) and FY22 revenue growth in the low- to-mid-teens range. (See ADSK stock analysis on TipRanks)
On Jan. 5, KeyBanc analyst Jason Celino increased the price target on Autodesk to $345 from $310 and reiterated a Buy rating. The analyst noted that despite the company's higher growth profile and expanding margins, it still trades at a five-turn discount to the broader industrial software average of 38 times 2022 EV(enterprise value)/free cash flow valuation multiple.
Celino believes that Autodesk's market dominance in architecture, its fundamentals, and long-term growth prospects remain "underappreciated" and deserve a premium valuation.
Overall, the consensus among analysts is a Strong Buy based on 11 Buys and 2 Holds. With the stock rising about 61% over the past 52 weeks, the average price target of $319 indicates a modest upside potential of 2.6% from current levels.
Adobe is one of the most diversified software companies, which caters to the requirements of students to large corporations, with several applications under its Adobe Creative Cloud, Adobe Document Cloud and Adobe Experience Cloud products.
The shift towards all things digital has increased the importance of Adobe’s products and solutions. Amid a favorable business environment, Adobe is well-positioned to capitalize on the massive opportunities across its key businesses.
The company expects its total addressable market for Creative Cloud, Document Cloud and Adobe Experience Cloud to increase to about $41 billion, $21 billion and $85 billion, respectively, in 2023. (See ADBE stock analysis on TipRanks)
In FY20 (ended Nov. 27, 2020), Adobe’s revenue grew 15% to about $13 billion, with subscription revenue rising 21% to $11.6 billion. Specifically, revenue from the company’s largest segment—Digital Media (which includes Creative Cloud and Document Cloud offerings) rose 20% to $9.2 billion, due to increased digital engagement amid the work-from-home environment.
Meanwhile, revenue from the Digital Experience segment grew 12% to $3.13 billion, while revenue from the Publishing and Advertising segment was down 24% to $510 million. All in all, strong top-line growth and operating margin expansion fueled a 28% gain in FY20 adjusted EPS to $10.10.
The company ended FY20 with Remaining Performance Obligation or RPO of $11.3 billion, implying a 15% increase driven by new contracts and renewals in the Digital Media and Digital Experience offerings.
Turning to FY21, Adobe expects its revenue to come in at $15.15 billion, based on 19% growth in the Digital Media as well as the Digital Experience segment.
Following the company’s 4Q and FY20 results, Oppenheimer analyst Brian Schwartz reiterated a Buy rating on Adobe with a price target of $550. The analyst believes that the company’s fundamentals remain solid based on “steady Digital Media strength, good midmarket recovery commentary, record cash flow, and strong growth in other key metrics” in 4Q.
That said, the 5-star analyst also highlighted some unfavorable trends, including a slowdown in organic growth as indicated by the company’s FY21 guidance and moderating growth trends in RPO, ARR (Annualized Recurring Revenue), revenue and billings.
Overall, Schwartz is bullish on the stock and concluded, “The durability of Adobe's growth and FCF model, along with a large TAM [Total Addressable Market], and likely conservative FY2021 estimates reinforce our view that ADBE should be a core investment holding.”
The rest of the Street is also firmly bullish on the stock, with a Strong Buy analyst consensus based on 8 unanimous Buys. Shares have advanced about 31% over the past year and the average price target of $575 indicates upside potential of 26% over the coming months.
The demand for cloud-based applications is expected to continue to benefit Adobe and Autodesk in the years ahead. While the Street’s Strong Buy analyst consensus for both companies indicates confidence in their long-term potential, currently the possible upside in Adobe stock makes it a better pick.
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