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Better Cloud Stock: Adobe vs. Autodesk

Adobe (NASDAQ: ADBE) and Autodesk (NASDAQ: ADSK) provide essential software for designers and other media professionals. Both companies also locked their users into sticky subscriptions by converting their desktop software into cloud-based services over the past decade.

That transformation turned Adobe and Autodesk into two of the market's most resilient software-as-a-service (SaaS) stocks. Over the past 10 years, Adobe's stock rallied nearly 1,100% while Autodesk's shares advanced more than 440%. The Nasdaq only rose about 290% during the same period.

Image source: Getty Images.

Should investors buy either of these stocks today as rising interest rates drive investment away from the tech sector? Let's look at their differences, growth rates, and valuations to decide.

The differences between Adobe and Autodesk

Adobe generates over 70% of its revenue from its Digital Media business, which houses its Creative Cloud (Photoshop, Illustrator, Premiere Pro, and other creativity software) and Document Cloud (Acrobat and Sign) services. The rest of its revenue comes from its Digital Experience business, which provides enterprise-oriented marketing, analytics, and workflow services.

Autodesk generates nearly three-quarters of its revenue from its flagship AutoCAD drafting software and additional architecture, engineering, and construction (AEC) services. The remainder of its revenue comes from its manufacturing and media and entertainment (M&E) software.

Which company is growing faster?

Adobe grew at a faster clip than Autodesk over the past five years. Between fiscal 2016 and 2021 (which ended last December), Adobe's annual revenue rose at a compound annual growth rate (CAGR) of 22%. Its adjusted earnings per share (EPS) increased at a CAGR of 33%.

Between fiscal 2017 and 2022 (which ended this January), Autodesk's annual revenue grew at a CAGR of 17%. After several years of losses, Autodesk turned consistently profitable again in fiscal 2020, and its adjusted EPS rose 45% in fiscal 2021 and 25% in 2022.

Adobe and Autodesk both generated stable growth throughout the pandemic because they firmly locked in their customers with annual subscriptions. Both companies also stopped doing business in Russia earlier this year.

Adobe faces a tougher slowdown than Autodesk

Neither of these software companies is completely immune to a recession, but the media sector -- which drives most of Adobe's growth -- is arguably more exposed to macroeconomic headwinds than Autodesk's more-diverse mix of design, engineering, and manufacturing customers.

That's why Adobe is bracing for a tougher slowdown than Autodesk this year. Adobe saw revenue rise 23% in fiscal 2021, but it expects only 12% growth this year as it grapples with "summer seasonality," higher taxes, unfavorable exchange rates, and its loss of sales in Russia and Belarus. It recently raised its Creative Cloud prices to offset some of that pressure, but it still expects its adjusted EPS to grow just 8% for the full year.

Autodesk's revenue increased 16% in fiscal 2022, and it anticipates 13% to 15% growth this year -- even though it faces a few of the same macroeconomic headwinds (especially in Russia and Europe) as Adobe. It expects its adjusted EPS to increase 27% to 31% for the full year.

The valuations and verdict

Adobe trades at 27 times forward earnings and 10 times this year's sales. Autodesk is slightly cheaper: It trades at 26 times forward earnings and eight times this year's sales.

Both stocks have declined more than 30% this year, but Autodesk certainly seems like a better value than Adobe right now. Autodesk grew at a slower rate than Adobe in the past, but it might weather the near-term headwinds -- and a potential recession -- much better than its larger cloud software peer.

Adobe is still a solid long-term investment, but its weak guidance for the rest of the year and its recent price hike indicate that darker days are ahead.

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


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