Enterprise software and services are extensively used across various sectors, including government, healthcare, manufacturing, and retail, due to their ability to streamline business operations.
Additionally, the market is expected to gain from the increasing adoption of cutting-edge technologies such as blockchain, the Internet of Things (IoT), Artificial Intelligence (AI), and machine learning.
The business software market is expected to reach $1.10 trillion by 2029, growing at a CAGR of 11.2%. Moreover, the growing popularity of advanced technologies like artificial intelligence and the Internet of Things, which enable memory chips to process large volumes of data more quickly, is anticipated to create growth opportunities for semiconductor market players in the near future.
Against this backdrop, let’s compare two tech stocks, NVIDIA Corporation (NVDA) and Adobe Inc. (ADBE), to analyze their growth potential.
The Case for NVIDIA Corporation Stock
Valued at $2.70 trillion by market cap, NVIDIA Corporation (NVDA) provides graphics, and compute and networking solutions in the United States, Taiwan, China, Hong Kong, and internationally.
NVDA’s stock has gained 134.4% over the past six months to close the last trading session at $1,096.33. Over the past year, the stock has surged 189.8%.
On May 12, 2024, NVDA announced that it would accelerate quantum computing efforts at national supercomputing centers around the world with the open-source NVIDIA CUDA-Q™ platform.
On March 11, NVDA announced that leading AI application developers across a wide range of industries were using NVIDIA digital human technologies to create lifelike avatars for commercial applications and dynamic game characters.
NVDA’s trailing-12-month gross profit margin of 75.29% is 52% higher than the industry average of 49.52%. Likewise, its trailing-12-month EBIT margin of 59.85% is significantly higher than the industry average of 4.72%. However, the stock’s trailing-12-month CAPEX/Sales of 1.49% is 35% lower than the industry average of 2.30%.
During the first quarter, which ended April 28, 2024, NVDA’s revenue increased 17% year-over-year to $26.04 billion. Its operating income came in at $16.91 billion, up 23% from the prior year’s quarter. Its earnings per share rose 19.9% from the year-ago value to $5.98.
However, the company’s cash outflow from investing activities grew 576.9% from the prior year’s period to $5.69 billion. As of April 28, 2024, NVDA’s total current assets amounted to $53.73 billion, up from $44.35 billion as of January 28, 2024.
Over the past three years, NVDA’s EBITDA has grown at 91.9% CAGR. Its net income grew at a 100% CAGR over the same period.
Street expects NVDA’s revenue for the second quarter (ending July 2024) to increase 109.7% year-over-year to $28.32 billion. The company’s EPS is estimated to grow 135.1% year-over-year to $6.35 for the same quarter. Moreover, the company has topped consensus revenue and EPS estimates in each of the trailing four quarters, which is excellent.
NVDA’s POWR Ratings reflect a mixed outlook. The stock has an overall rating of C, which translates to a Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
NVDA has a C grade for Momentum. It is ranked #23 among 93 stocks in the Semiconductor & Wireless Chip industry.
Click here for the additional POWR Ratings for NVDA (Value, Growth, Stability, and Momentum).
The Case for Adobe Inc. Stock
With a $199.25 billion market cap, Adobe Inc. (ADBE) operates as a diversified software company worldwide. It operates through three segments: Digital Media; Digital Experience; and Publishing and Advertising.
ADBE’s stock has declined 3.9% over the past month and 27.2% over the past six months to close the last trading session at $444.76.
ADBE’s trailing-12-month gross profit margin and EBIT margin of 88.08% and 34.97% are 77.9% and 640.6% higher than the industry averages of 49.52% and 4.72%, respectively. However, the stock’s trailing-12-month CAPEX/Sales of 1.48% is 35.3% lower than the industry average of 2.30%.
During the first quarter, which ended March 1, 2024, ADBE’s total revenue increased 11.2% year-over-year to $5.18 billion. Its gross profit rose 12.2% from the year-ago value to $4.59 billion. Moreover, the company’s non-GAAP net income and non-GAAP net income per share grew 17.1% and 17.9% year-over-year to $2.05 billion and $4.48, respectively.
However, the company’s operating income declined 42.8% year-over-year to $907 million.
Over the past three years, ADBE’s EBITDA has grown at 12.5% CAGR. However, its net income declined at a 4.8% CAGR over the same period.
Analysts expect ADBE’s revenue for the second quarter (ended May 2024) to increase 9.8% year-over-year to $5.29 billion. Likewise, its EPS for the same quarter is projected to grow 12.3% year-over-year to $4.39. For the fiscal year 2024, the company’s revenue and EPS are expected to grow 10.6% and 12.1% year-over-year to $21.46 billion and $18.02, respectively.
ADBE’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall C rating, translating to a Neutral in our proprietary rating system.
The stock has a C grade for Stability, Growth, Value, Momentum, and Sentiment. ADBE is ranked #44 out of 136 stocks in the Software - Application industry.
In addition to the POWR Ratings I’ve just highlighted, you can see ADBE’s ratings for Quality here.
Evaluating June AI Growth Potential in NVIDIA Corp. (NVDA) vs. Adobe (ADBE)
Growing digital transformation worldwide is expected to drive robust growth and expansion in the software industry. Furthermore, companies are increasingly acknowledging AI's substantial potential to drive innovation and enhance efficiency, resulting in a significant rise in demand for AI-powered solutions.
Both NVDA and ADBE stand to benefit from the tech industry’s tailwinds. However, given their mixed fundamentals, waiting for better entry points in these stocks could be wise now.
Our research shows that the 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 Semiconductor & Wireless Chip industry here and the Software - Application industry here.
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NVDA shares closed at $1,096.33 on Friday, down $-8.67 (-0.78%). Year-to-date, NVDA has gained 121.40%, versus a 11.30% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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