One of the largest and most diversified software companies globally, San Jose, Calif.-based Adobe Inc. (ADBE) operates through three segments: Digital Media, Digital Experience, and Publishing. In comparison, The Trade Desk, Inc. (TTD) in Ventura, Calif., operates a self-service cloud-based platform that allows buyers to create, manage, and optimize data-driven digital advertising campaigns in various ad formats and channels.

With the ongoing rapid, global,  digitalization, the demand for software solutions has been high given their growing use across several industries, including retail, manufacturing, technology, and healthcare. Furthermore, because the hybrid working culture is in large measure here to stay, the demand for software solutions is expected to continue.  According to a Grand View Research report, the global business software and services market is expected to grow at an 11.3% CAGR over the next seven years. So, established software companies ADBE and TTD should benefit from the industry tailwinds.

ADBE has gained 41.5% over the past year, while TTD has returned 91.3%. However, ADBE’s 34.4% gains over the past six months are significantly higher than TTD’s 9.3% returns. ADBE is also the clear winner with 19.5% gains versus TTD’s 10.4% in terms of their past three months’ performance.

But which of these two stocks is a better buy now? Let’s find out.

Click here to check out our Software Industry Report for 2021

Latest Developments

ADBE introduced the next generation of its Real-time Customer Data Platform (CDP) on April 27. The platform is expected to help brands activate known and unknown customer data to manage the entire customer profile and journey seamlessly in one system absent  third-party cookies. This development highlights the company’s commitment to its customers’ data privacy.

On July 7, TTD launched its new trading platform—Solimar. The platform is expected to help marketers optimize their digital advertising campaigns across the open internet. Dave Pickles, the company’s co-Founder and CTO, said, “Solimar is the result of more than two years of engineering work and represents a breakthrough in surfacing the most important decisions for today’s marketers.”

Recent Financial Results

ADBE’s top line surged 22.6% year-over-year to $3.84 billion for the fiscal second quarter ended June 4, 2021. The company’s digital media segment revenue increased 25% year-over-year to $2.79 million, while its document cloud segment increased 30% year-over-year to $469 million. Its non-GAAP net income came in at $1.46 billion, up 22.7% year-over-year. And its non-GAAP EPS was  $3.03, representing a 23.7% year-over-year rise.

For the first quarter, ended March 31, 2021, TTD’s revenue was  $219.81 million, representing a 36.8% year-over-year increase. The company’s income from operations in the quarter was  $7.78 million, versus $10.77 million in the year-ago period. Its non-GAAP net income increased 61.4% year-over-year to $70 million, while its non-GAAP EPS increased 56.7% from the same period last year to $1.41.

Past and Expected Financial Performance

ADBE’s revenue and EPS grew at 21% and 36.6% CAGRs, respectively, over the past three years. The company’s revenue is expected to grow 21.9% in the current year and 14.9% next year. Analysts expect ADBE’s EPS to increase 17.1% for the quarter ending August 31, 2021, and 96% for the quarter ending November 30, 2021. Also,  its EPS is expected to grow at an 18.5% rate per annum over the next five years.

In comparison, TTD’s revenue and EPS grew at38% and 58% CAGRs, respectively, over the past three years. Analysts expect the company’s revenue to increase 36.3% in its fiscal year 2021 and 27.9% in fiscal 2022. Its EPS is expected to increase 44.4% for the about-to-be-reported quarter, ended June 30, 2021, but decline 7.7% for the quarter ending September 30, 2021. TTD’s EPS is expected to grow at a 32% rate  per annum over the next five years.

Profitability

ADBE’s $14.39 billion trailing-12-month revenue is much higher than TTD’s $895.18 million. Furthermore,  ADBE is more profitable, with 87.87% and 38.79% gross profit  and net income margins, respectively, compared to TTD’s 78.88% and 26.91%.

Also, ADBE’s ROE, ROA, and ROTC of 45.14%, 13.63%, and 18.84%, respectively, compare with TTD’s 27.40%, 4.04%, and 7.32%.

Valuation

In terms of forward EV/Sales, TTD is currently trading at 33.58x, which is 78.5% higher than ADBE’s 18.81x. TTD’s forward EV/EBITDA and non-GAAP P/E of 94.79x and 132.44x, respectively, are higher than ADBE’s 37.64x and 50.49x.

So, ADBE is the more affordable stock.

POWR Ratings

ADBE has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. On the other hand, TTD 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.

ADBE has a B grade for Sentiment, which is consistent with analysts’ expectations that the stock will hit $626.94 in the near term, indicating a potential 1.4% upside. In contrast,  TTD has a C grade for Sentiment, which is in sync with analysts’ expectations that it will hit $81.21 in the near term, which indicates a potential 1.8% decline.

ADBE has a B grade for Stability also, in keeping with its 0.95 beta. TTD, however, has a D grade for Stability, consistent with its 2.49 beta.

Of the 135 stocks in the Software – Application industry, ADBE is ranked #25 while TTD is ranked #70.

Beyond what I’ve stated above, we’ve also rated both the stocks for Quality, Growth, Value, and Momentum. Click here to view all the ADBE ratings. Also, get all the TTD ratings here.

The Winner

Both ADBE and TTD are expected to benefit from the increasing demand for software solutions over the long run as digitalization continues and several companies continue with remote working. While TTD has the edge over ADBE in the data management space, with ADBE’s Audience Manager having a much lesser market share and customers than TDD, we it is wise to bet on ADBE now because of its higher profitability and lower valuation.

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 top-rated stocks in the Software – Application industry here.

Click here to check out our Cloud Computing Industry Report for 2021

ADBE shares were trading at $618.74 per share on Wednesday morning, up $0.46 (+0.07%). Year-to-date, ADBE has gained 23.72%, versus a 18.01% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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