The post-pandemic era has witnessed a rapid shift toward digital transformation. With individuals and businesses heavily relying on software applications, the prospects of the industry appear promising.
Against this backdrop, in this piece, I have compared the fundamentals of two prominent software companies, Salesforce, Inc. (CRM) and Atlassian Corporation (TEAM), to determine which one could be a better addition to your portfolio.
The global software market is anticipated to hit $1.79 trillion by 2032, witnessing an impressive CAGR of 11.7% from 2023 to 2032. The surge in demand for advanced mobile applications and cloud-based solutions has been the driving force for the market growth.
Additionally, the integration of generative Artificial Intelligence (AI) into the development of these applications is poised to propel the industry's expansion further.
Generative AI in software development employs artificial intelligence techniques, including deep learning and machine learning, to enhance efficiency and productivity. The market size 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.
Meanwhile, Gartner predicts a double-digit growth in the software segment in 2024, primarily propelled by increased investment in cloud technologies. The outlook for 2024 indicates a surge in global software spending to $1.04 trillion, showcasing a 13.8% year-on-year rise.
Considering the solid growth projections, both CRM and TEAM should reap benefits. In terms of price performance, both stocks are on a rally. Over the past nine months, TEAM outperformed CRM by surging 61.5% compared to CRM’s 42.8% gain. But over the past year, CRM outshined TEAM by surging 106.2% versus TEAM’s 89.2% gain.
Also, CRM’s shares have soared 100.9% year-to-date to close the last trading session at $266.34. Meanwhile, TEAM’s shares gained 87.1% year-to-date to close the last trading session at $240.80.
However, to find out which Software - Application stock is the better pick, let us dig deeper into the fundamentals of the featured stocks.
Recent Developments
On September 12, CRM revealed its collaboration with Williams-Sonoma, Inc. (WSM), a global leader in digital-first, design-centric, and sustainable home goods retailing. Together, they aim to integrate CRM’s technology with WSM’s diverse brand portfolio.
This integration will provide a comprehensive 360-degree view of customer preferences and interactions across brands. The objective is to enhance customer interactions by providing precisely tailored and more personalized shopping experiences for customers worldwide.
On November 30, TEAM acquired Loom, a platform specializing in video messaging for seamless communication through instantly shareable videos. Loom's focus on asynchronous video is highlighted by its business users generating nearly 5 million videos each month.
Leveraging TEAM’s extensive knowledge of team workflows, the integration of Loom will take the collaboration experience for teams to a higher level. Leaders will have the capability to use videos for broad employee communication, sales teams can send personalized video updates to clients, and HR teams can greet new employees with individualized onboarding videos.
Recent Financial Results
CRM’s total revenues for the fiscal 2024 third quarter (ended October 31, 2023) increased 11.3% year-over-year to $8.72 billion. Its gross profit improved 14.2% from the year-ago value to $6.57 billion. Moreover, the company’s net income and EPS came in at $1.22 billion and $1.25, up 482.9% and 495.2% from the prior-year quarter, respectively.
For the fiscal 2024 first quarter, which ended on September 30, 2023, TEAM’s total revenues increased 21.1% year-over-year to $977.78 million, while its gross profit rose 19.7% from the year-ago value to $799.75 million. However, the company’s net loss amounted to $31.88 million and $0.12 per share, worsening 132% and 140% from the prior-year quarter, respectively.
Past and Expected Financial Performance
CRM’s revenue has grown at a CAGR of 18.7% over the past three years. Street expects CRM’s revenue and EPS for the fiscal fourth quarter (ending January 2024) to increase 9.9% and 34.5% year-over-year to $9.22 billion and $2.26, respectively.
Conversely, TEAM’s revenue has improved at a CAGR of 29.4% over the past three years. Analysts predict TEAM’s revenue for the fourth quarter (ending June 2024) to increase 15.5% year-over-year to $1.08 billion, while its EPS for the same quarter is expected to decline marginally year-over-year to $0.57.
Profitability
CRM’s trailing-12-month net income margin of 7.63% compares to TEAM’s negative 13.63%. Likewise, CRM’s trailing-12-month EBIT margin of 15.87% compares to TEAM’s negative 6.29%. Furthermore, CRM’s trailing-12-month levered FCF margin of 33.93% is higher than TEAM’s 29.93%.
Thus, CRM is more profitable.
Valuation
In terms of the forward non-GAAP P/E ratio, TEAM’s 99.03x is 204.7% higher than CRM’s 32.50x. Also, TEAM’s forward EV/EBIT multiple of 73.47 is 200.2% higher than CRM’s 24.47. Furthermore, TEAM’s forward Price/Sales ratio of 14.97x is 102% higher than CRM’s 7.41x.
Thus, 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, TEAM 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. CRM has a B grade for Growth, justified by its solid historical revenue growth over the past three years. Similarly, TEAM’s B grade for growth is in sync with the high revenue growth metrics over the past three years.
Moreover, CRM has a C grade for Value, justified by its mixed valuation metrics. The stock’s forward non-GAAP PEG multiple of 1.32x is 39.1% lower than the industry average of 2.16x. Meanwhile, its forward Price/Sales ratio of 7.41x is 144.9% higher than the industry average of 3.02x.
On the other hand, TEAM’s D grade for Value is consistent with its stretched valuation metrics. In terms of forward EV/Sales, TEAM’s 14.73x is 397.3% higher than the industry average of 2.96x. Furthermore, its forward Price/Sales multiple of 14.97x is 395% higher than the industry average of 3.02x.
Additionally, CRM has an A grade for Sentiment in sync with its positive analyst estimates for the to-be-reported quarter. In contrast, TEAM’s C grade for Sentiment is consistent with the mixed analyst projections for the quarter ending June 2024.
Among the 131 stocks in the Software - Application industry, CRM is ranked #11, while TEAM is ranked #54.
Beyond what we’ve stated above, we have also rated both stocks for Momentum, Stability, and Quality. Click here to view CRM’s ratings. Get all TEAM ratings here.
The Winner
While both CRM and TEAM should benefit from the promising industry landscape due to the advent and widespread adoption of generative AI, CRM’s superior financials, higher profitability, and lower valuation could make it a better investment candidate for your portfolio over TEAM.
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?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
CRM shares were trading at $265.56 per share on Tuesday morning, down $0.78 (-0.29%). Year-to-date, CRM has gained 100.29%, versus a 26.12% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.
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