MSFT: Microsoft vs. Salesforce: Which Stock is a Better Buy

Microsoft Corporation (MSFT) and Salesforce.com Inc (CRM), two of the most prominent and successful players in the software industry, have been thriving amid the coronavirus pandemic and are shaping the future of enterprise software solutions with their cloud-based offerings.

MSFT develops, licenses, and supports software, services, devices, and solutions, worldwide. The company’s products include operating systems for computing devices, intelligent devices, server, productivity and business solution applications, desktop and server management tools, and software development tools that enable companies’ digital transformation in the era of cloud computing. MSFT s through three segments – Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.

CRM is the global leader in customer relationship management bringing companies closer to their customers in the digital age. CRM enables companies of varying sizes in various industries to exploit powerful technologies, such as cloud, mobile, social, internet of things, AI, voice and blockchain, to create a 360-degree view of their customers. CRM It operates through two segments – Subscription & Support, and Professional services & Other.

Both the stocks generated decent returns over the past three years. While MSFT has returned 160% over this period, CRM gained 118.8%. However, in terms of year-to-date performance, CRM is a clear winner with 40% returns versus MSFT’s 36%. But which of these stocks is a better pick now? Let’s find out.

Latest Movements

MSFT recently announced a global collaboration with Johnson Controls International (JCI), a global leader in smart and sustainable buildings, to OpenBlue Digital Twin and Azure Digital Twins. The integration aims to encompass the entire ecosystem of building and device management technologies with digital cloud technologies.

In October, in collaboration with C3.ai and Adobe (ADBE), MSFT launched C3 AI CRM, the first enterprise-class, AI-first customer relationship management solution purpose-built for industries that integrates Adobe Experience Cloud and drives customer-facing operations with predictive business insights.

CRM announced Salesforce Hyperforce today. It is a reimagination of the company’s platform architecture that is built to deliver Salesforce Customer 360, including Sales Cloud, Service Cloud, Marketing Cloud, Commerce Cloud, Industries more securely and reliably on major public clouds. Moreover, Bentley Motors, a British luxury automotive company, will deploy CRM cloud solutions to provide its employees a 360-degree view of customers.

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Also, on December 1^st 2020, CRM entered into a definitive agreement to acquire Slack Technologies, Inc. (WORK), one of the most innovative enterprise communications platforms. With the acquisition, CRM aims to create an operating system that will uniquely enable companies to grow and in the all-digital world.

Recent Financial Results

In its fiscal first quarter that ended September 2020, MSFT’s revenue surged 12% year-over-year to $37.2 billion on back of Office Consumer products and cloud services revenue grew 13%. Microsoft 365 Consumer subscribers increased to 45.3 million during the quarter. The company’s EPS grew 32% year-over-year to $1.82.

CRM’s revenue for the third quarter ended October 2020 grew 19% year-over-year to $5.42 billion and a significant portion of the revenue increase came from the 20% growth in subscription and support segment. CRM’S non-GAAP EPS grew 132% year-over-year to $1.74.

Here CRM is in an advantageous position.

Past and Expected Financial Performance

MSFT’s revenue and EPS have grown at a CAGR of 14% and 22.5%, respectively, over the past 3 years. Also, the CAGR of the company’s free cash flow has been 34.4%.

Analysts expect Microsoft’s revenue to increase 8.9% in the current quarter, 10.7% in the current year and 11.1% next year. They expect its EPS to grow 8.6% in the current quarter, 7.5% in the current year and 10.3% next year. Moreover, its EPS is expected to grow at a rate of 14.5% per annum over the next five years.

CRM’s revenue and EPS grew at a CAGR of 26.7% and 198.9%, respectively, over the past 3 years. The CAGR of the company’s free cash flow has been 36.5%.

Analysts expect CRM’s revenue to increase 17% in the current quarter, 23.5% in the current year, and 20.4% next year. The company’s EPS is expected to grow 13.6% in the current quarter and 54.8% in the current year, but to decline 24.2% next year. However, CRM’s EPS is expected to grow at a rate of 14.5% per annum over the next five years.

MSFT has an edge over CRM here.

Profitability

MSFT’s trailing-12-month revenue is more than seven times CRM’s. Also, MSFT is more profitable, with a net profit margin of 32.3% versus CRM’s 17.5%.

Moreover, MSFT’s ROE and ROA of 41.4% and 12.1% compare favorably with CRM’s 9.7% and 0.3% respectively.

Valuation

In terms of forward P/E, CRM is currently trading at 54.73x, 72.4% more expensive than MSFT, which is currently trading at 31.74x. Though MSFT is more expensive in terms of trailing-12-month P/S (11.06x versus 10.11x), its forward PEG of 2.46x is 18.3% higher than CRM’s 2.08x.

In terms of trailing-12-month price/cash flow, CRM’s 48.94x is nearly double MSFT’s 24.48x.

MSFT looks much more affordable compared to CRM.

POWR Ratings

While MSFT is rated “Strong Buy” in our proprietary POWR Ratings system, CRM is rated “Neutral.” Here are how the four components of overall POWR Rating are graded for MSFT and CRM:

MSFT has an “A” for Trade Grade and Buy & Hold Grade, and a “B” for Peer Grade and Industry Rank. In the 96-stock Software – Application industry, it is ranked #1.

CRM has a “B” for Industry Rank, a “C” for Trade Grade and Buy & Hold Grade, and a “D” for Peer Grade. It is ranked #32 in the 48-stock Software – Business group.

The Winner

While MSFT and CRM are both good long-term investments based on the increasing reliance on technology globally, MSFT’s market dominance and superior pace of expansion appears to make it a better buy.

CRM may play a key role in scaling WORK up to more high-paying corporates, which could pose a challenge to Microsoft Teams and Azure. However, MSFT is a relatively cheaper way to bet on the immense growth potential of the cloud markets and the speed of the global digital transformation. MSFT is a proven winner and is well-positioned to surge.

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MSFT shares were trading at $214.20 per share on Wednesday morning, down $1.81 (-0.84%). Year-to-date, MSFT has gained 37.27%, versus a 16.57% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...