Amidst the expanding software industry, leading software companies Salesforce, Inc. (CRM) and The Trade Desk, Inc. (TTD) recently demonstrated robust financial performances and are poised to capitalize on the expanding software market. Both companies outperformed consensus revenue estimates in the fiscal fourth quarter. However, while CRM also surpassed consensus EPS estimates, TTD fell short in this regard.
Moreover, delving deeper into their fundamentals reveals more nuanced differences that could sway investor decisions.
In this article, I will compare the fundamentals of both stocks to determine which one could be the better addition to your portfolio. But before that, let us look at the current dynamics in the software industry.
The rising demand for mobile and online apps driven by increased smartphone and internet usage fuels software market expansion. As cyberattacks escalate, organizations prioritize data security, driving demand for cybersecurity solutions like compliance tools, encryption tech, and security apps, bolstering the software application sector.
The global software market is anticipated to hit $1.79 trillion by 2032, witnessing an impressive CAGR of 11.7% from 2023 to 2032.
Moreover, Gartner (IT) forecasts a 12.7% annual rise in global software spending this year, reaching $1.03 trillion. Besides, spending on IT services is expected to reach $1.50 trillion, up 8.7% this year.
Additionally, generative AI offers automation of development tasks, enabling even non-professionals to create code and solutions efficiently. This addresses the shortage of skilled developers, expediting the development process and fueling the growth of generative AI in the software market.
The market for generative AI in software development is expected to exceed $169.20 billion by 2032, growing at a robust CAGR of 21.4% spanning 2023 to 2032. The favorable industry trends should benefit both stocks.
However, in terms of price performance, CRM leads the way. CRM’s stock has soared 66.9% over the past year, while TTD’s stock has returned 40.1%. While CRM has gained 35.8% over the past six months, TTD has declined 2.7% over the same period.
Let us delve deeper into the fundamental aspects of both stocks to determine which is the superior choice.
Recent Developments
On March 6, 2024, CRM unveiled Einstein 1 Studio, a suite of low-code tools enabling the customization of Einstein Copilot, the conversational AI assistant at TrailblazerDX. It includes Copilot Builder, Prompt Builder, and Model Builder, empowering businesses to deliver tailored AI experiences across all Salesforce apps.
With enterprises facing challenges in AI implementation, Einstein 1 Studio addresses the need for intuitive interfaces, customizable AI models, and access to trusted data.
Moreover, on the same day, CRM announced its collaboration with Turtle Bay Resort, a luxury vacation destination on O‘ahu’s North Shore, Hawaii. Together, both companies aim to enhance service with AI and personalize every guest experience. Leveraging CRM's Einstein 1 Platform, Turtle Bay intends to engage new guests with tailored approaches.
On the flip side, on February 15, TTD disclosed its repurchase of around $220 million worth of its Class A common stock in the fourth quarter of 2023. Throughout the year ending December 31, 2023, the company bought back approximately $647 million of its Class A common stock, averaging a repurchase price of $63.87. By December 31, 2023, TTD still had $53 million allocated and authorized for further repurchases.
Recent Financial Results
In the fiscal 2024 fourth quarter (ended January 31, 2024), CRM’s total revenue increased 10.8% year-over-year to $9.29 billion. Its gross profit improved 13.6% from the year-ago quarter to $7.14 billion. Moreover, the company’s net income and EPS came in at $2.25 billion and $2.29, up 35.9% and 36.3% from the prior-year quarter, respectively. CRM’s free cash flow improved 26.7% year-over-year to $3.26 billion.
In contrast, TTD’s total revenues increased 23.4% year-over-year to $605.80 million during the fiscal fourth quarter ended December 31, 2023. The company’s adjusted EBITDA rose 15.8% from the year-ago quarter to $283.69 million. Its non-GAAP net income grew 8.8% year-over-year to $206.86 million. But its total operating expenses increased 18.1% from the previous-year quarter to $461.36 million.
Dividend Payout
On February 28, CRM announced a cash dividend of $0.40 per share on its common stock, reinforcing its financial strength and commitment to shareholder value. The dividend is payable on April 11, 2024.
However, TTD doesn’t pay dividends.
Past and Expected Financial Performance
CRM’s revenue has grown at a CAGR of 17.9% over the past three years. Its EBIT and EBITDA have grown at a CAGR of 136.2% and 40.8% over the past three years.
Analysts expect CRM’s EPS to rise 19% this year and 39.6% in the fiscal first quarter. Its revenue is expected to rise 9.2% this year and 10.9% in the first quarter.
Conversely, TTD’s revenue has improved at a CAGR of 32.5% over the past three years. However, its net income and EPS declined at a CAGR of 9.6% and 9.8% over the past three years.
Street predicts TTD’s EPS will rise 17% this year but decline 7.4 % in the fiscal first quarter. Its revenue is likely to increase 22.5% this year and 24.9% in the first quarter.
Profitability
CRM’s trailing-12-month net income margin of 11.87% compares to TTD’s 9.19%. CRM’s trailing-12-month EBIT margin of 17.21% compares to TTD’s 10.30%. Furthermore, CRM’s trailing-12-month levered FCF margin of 33.14% is higher than TTD’s 30.12%.
Thus, CRM is more profitable.
Valuation
In terms of the forward non-GAAP P/E ratio, TTD’s 55.36x is higher than CRM’s 31.20x. Also, TTD’s forward EV/Sales multiple of 16.26 is also higher than CRM’s 7.76. Furthermore, TTD’s forward Price/Sales ratio of 16.74x is higher than CRM’s 7.78x.
Hence, CRM is more affordable.
POWR Ratings
CRM has an overall rating of A, which equates to a Strong Buy in our proprietary POWR Ratings system. Conversely, TTD has an overall rating of C, translating to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories.
Both CRM and TTD have a B grade for Growth, supported by their consistent historical revenue growth over the last three years.
However, CRM has a C grade for Value, which is justified by its mixed valuation metrics. The stock’s forward non-GAAP PEG multiple of 1.41x is 29% lower than the industry average of 1.98x. Meanwhile, its forward EV/EBITDA multiple of 35.13 is 35.1% higher than the industry average of 17.81.
On the other hand, TTD’s D grade for Value is consistent with its premium valuation metrics. In terms of forward non-GAAP PEG, TTD’s 2.68x is 68.8% higher than the industry average of 1.59x. Furthermore, its forward EV/EBITDA multiple of 40.29 is 408.6% higher than the industry average of 7.92.
Among the 131 stocks in the Software – Application industry, CRM is ranked #11, while TTD is ranked #54.
Beyond what we’ve stated above, we have also rated both stocks for Momentum, Stability, Sentiment, and Quality. Click here to view CRM’s ratings. Get all TTD ratings here.
The Winner
Last year, generative AI significantly influenced software development, with cloud-native technologies continuing to evolve, promising reduced complexity, scalability, and cost-efficiency. Moreover, the growing demand for AI and ML extends beyond IT, revolutionizing the application software sector.
Given the favorable industry landscape driven by the rise and extensive integration of generative AI, both CRM and TTD stand to gain.
However, CRM's new dividend policy, stronger financial performance, higher profitability, and robust price performance may present a more compelling investment opportunity compared to TTD.
Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy. View all the top-rated stocks in the Software – Application industry here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
CRM shares were trading at $306.14 per share on Monday afternoon, up $0.86 (+0.28%). Year-to-date, CRM has gained 16.34%, versus a 7.40% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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