Software giant Microsoft Corporation (MSFT) develops, licenses, and supports software, services, devices, and solutions worldwide. In comparison, salesforce.com, inc. (CRM), which is also a well-known player in the industry, develops enterprise cloud computing solutions with a focus on customer relationship management worldwide.
Over the past year, the adoption of a remote work structure has intensified the role of technology in organizations. Organizations are seeking new ways to improve their operations to ensure higher productivity. Changing market dynamics have led to an accelerated demand for cloud-based solutions, which has aided the software as a service (SaaS) market. The global SaaS market is expected to reach $436.9 billion in 2025 growing at a 12.5% CAGR. As major players in the industry, we think both MSFT and CRM should continue to benefit substantially from the industry tailwinds.
MSFT has gained 27.2% in price over the past six months, while CRM has returned 23.3% over the period. Also, MSFT’s 33.6% gains year-to-date compare with CRM’s 17.2% returns. In terms of their past year’s performance, MSFT is the clear winner with 40.7% price gains versus CRM’s 4.1%.
But which stock is a better buy now? Let’s find out.
On July 14, MSFT unveiled Windows 365, a cloud service that introduced a new way to experience Windows 10 or Windows 11 to businesses of all sizes. “Just like applications were brought to the cloud with SaaS, we are now bringing the operating system to the cloud, providing organizations with greater flexibility and a secure way to empower their workforce to be more productive and connected, regardless of location,” said Satya Nadella, chairman and CEO, Microsoft.
On August 10, CRM announced Salesforce+, an all-new streaming service with compelling live and on-demand content for every role, industry, and line of business, all in one place. The evolving digital-first world should provide Salesforce+ the perfect opportunity to gain popularity quickly.
Recent Financial Results
MSFT’s revenue increased 21% year-over-year to $46.15 billion in its fiscal fourth quarter, ended June 30. Its operating income stood at $19.10 billion, up 42% from the same period last year. Its net income grew 47% from its year-ago value to $16.46 billion, and its EPS increased 49% year-over-year to $2.17.
For its fiscal second quarter, ended July 31, CRM’s total revenues increased 23.1% year-over-year to $6.34 billion. Its gross profit improved 23.1% year-over-year to $4.73 billion, while its income from operations grew 86.5% from its year-ago value to $332 million. Its cash and cash equivalents balance rose 55.5% year-over-year to $6.30 billion.
Past and Expected Financial Performance
MSFT’s net income and EPS have grown at CAGRs of 54.6% and 55.8%, respectively, over the past three years. Analysts expect MSFT’s revenue to increase 23.2% in the current quarter, 14.2% in the current year, and 13% in the next year. Its EPS is expected to grow 13.7% in the current quarter, 9.3% in the current year, and 14.7% in the next year. Furthermore, its EPS is expected to grow at a 15.3% rate per annum over the next five years.
In comparison, CRM’s net income and EPS have grown at CAGRs of 35% and 25.3%, respectively, over the past three years. Analysts expect the company’s revenue to increase 23.8% in the current year and 19.6% in the next year. Its EPS is expected to decline 47.1% in the current quarter and 10.6% in the current year. However, its EPS is expected to grow marginally in the next year. Also, CRM’s EPS is expected to grow at a 10.4% rate per annum over the next five years.
MSFT is more profitable, with net income and EBITDA margins of 36.45% and 48.08%, respectively, compared to CRM’s 9.99% and 15.17%.
MSFT’s ROE, ROA and ROTC of 47.08%,13.76% and 20.58%, respectively, compare with CRM’s 5.01%, 0.99% and 1.25%.
Thus, MSFT is more profitable here.
In terms of forward EV/Sales, MSFT is currently trading at 11.53x, which is 13.1% higher than CRM, which is currently trading at 10.02x. However, CRM’s 34.32 forward EV/EBITDA ratio is 30.8% higher than MSFT’s 23.76.
MSFT has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. CRM, in contrast, has an overall C rating, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
MSFT has a B Stability grade, which is consistent with its relatively low 0.78 beta. In comparison, CRM has a 1.09 beta, which justifies its Stability grade of C.
MSFT has a B grade for Quality. This is justified because MSFT’s 48.08% EBITDA margin is 227.1% higher than the 14.70% industry average. CRM, in contrast, has a grade of C for Quality. This is justified because CRM’s 15.17% EBITDA margin is 3.2% higher than the industry average.
Of the 146 stocks in the Software – Application industry, MSFT is ranked #15, while CRM is ranked #50.
The SaaS market is expanding rapidly owing to the growing demand for cloud-based solutions. While both MSFT and CRM dominate the industry, its higher profit margins and solid growth prospects we think make MSFT the better bet now.
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.
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MSFT shares were trading at $295.71 per share on Friday afternoon, down $1.54 (-0.52%). Year-to-date, MSFT has gained 33.82%, versus a 19.92% rise in the benchmark S&P 500 index during the same period.
About the Author: Subhasree Kar
Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics. More...
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