Legacy software providers have been looking for ways to compete with the leading CRM cloud-based software provider, Salesforce.com, Inc. (CRM). One idea to slow down CRM’s rapid growth was to send all the data collected from their various products to a single location where additional analysis could be performed.
Microsoft Corporation (MSFT), Adobe Systems Inc. (ADBE) and SAP AG (SAP) announced their joint participation in the Open Data Initiative this September. This collaboration comes as cloud-based software becomes more prevalent, which can make it harder to gain actionable insights from data when information is stored in various disparate systems.
“You have these very sophisticated, rich application suites from SAP, from Adobe, from Microsoft. And the commitment you’re hearing from the three of us is that we’re going to unlock the data across all of these suites,” said Microsoft CEO Satya Nadella.
While analysts believe this initiative represents a promising opportunity for these companies, we wanted to take a closer look to see if they really have what it takes to compete with Salesforce.
Microsoft Corporation (MSFT)
With a market cap of $1 trillion, it’s no question that Microsoft is still a force to be reckoned with.
The company has maintained its place as a leader in the software market with both its legacy and cloud-based solutions. CRM has been mirroring Microsoft by tailoring its products to run alongside its customers’ existing software, something MSFT has already been doing for quite some time. Salesforce recently acquired MuleSoft, Inc. and Tableau Software, Inc. (DATA), both of which have software offerings that run with pre-existing on-premises systems.
CRM’s Sales Cloud has also consistently outperformed MSFT’s cloud-based sales product, Dynamics 365. The aggregated data from this project will be used to improve Dynamics 365 as well as its Azure product.
Ahead of today’s Q4 2019 earnings release, share prices are up 34% year-to-date with management saying it’s only going to get better. Q4 fiscal revenue is expected to reach $33 billion, representing a 9% increase. Expected EPS is $1.21 which would be a 7% jump. Most importantly, management is projecting $9.6 billion in revenue to be generated from its Intelligent Cloud.
Oppenheimer analyst, Timothy Horan mirrored that sentiment today stating, “We expect a strong quarter from Microsoft as it is seeing momentum in its cloud-based business, which now represents a third of revenues and is growing 35% year-over-year.” The five-star analyst reiterated his Buy rating and $145 price target. He has a 79% success rating and 17% average return per rating.
Another analyst, Brent Bracelin, kept his Buy rating and $143 price target on MSFT yesterday. “We expect another solid quarter with revenue increasing 9% year-over-year to $32.8 billion, driven by strong commercial cloud tailwinds that could elevate the cloud revenue mix to 33% vs 5% in FY15,” he said. The analyst has an average return per rating of 31% and a 77% success rate.
The stock boasts a ‘Strong Buy’ analyst consensus and $147 average price target, suggesting 8% upside potential.
Adobe Systems Inc. (ADBE)
In terms of delivering best in class visual solutions for both the consumer and enterprise sides, nobody does it quite as well as Adobe.
Its cloud-based products are growing rapidly. The company’s Document Cloud, Creative Cloud and Experience Cloud are expected to reach 15% annualized revenue growth into fiscal 2025. If the initiative proves successful, this growth could accelerate at an even faster pace.
In addition to its cloud-based software, ADBE created a software system, Experience Platform, to compete directly with CRM. It will unify business applications, and connect them with new apps from third-party developers and its customers’ other programs.
ADBE had a strong second quarter, with revenue reaching over $5 billion, up 25% year-over-year. Adjusted EPS increased by 10% year-over-year from $3.21 to $3.54. While the stock’s valuation is on the high side, trading at 53.9 times trailing twelve month earnings, analysts believe Adobe can sustain its profit growth.
Yesterday, analyst Jennifer Lowe said, “The company's profit growth should support the current enterprise value to expected 2020 earnings multiple of 31-times, and we expect Adobe shares to continue moving higher.” She maintained her Buy rating and $330 price target, suggesting upside potential of 7%. Lowe has a success rate of 69% and a 15% average return per rating.
Another top analyst, Joseph Bonner, agrees that more growth is coming. “The company is well positioned at the center of the exploding market for digital video content with a unique asset collection in its Creative Cloud digital content portfolio. We see Adobe continuing to accelerate organic product refreshes and new rollouts as well as partnering with industry leaders to drive further growth,” he said. He kept his Buy rating and $320 price target on June 20.
The Street has high hopes for ADBE. The stock has a ‘Strong Buy’ analyst consensus and average price target of $319, suggesting 3% upside potential.
SAP AG (SAP)
In the past, the German software company has struggled to keep up with the other big names on this list. However, it has made a significant effort to redefine the CRM market. SAP believes it can take market share from Salesforce with its portfolio of SaaS applications including broad sets of apps for HCM, ERP and CRM.
However, the situation didn't appear to be improving after the company released disappointing Q2 2019 earnings results today. Management said that investors should not expect big margin gains until 2020, with the company reporting a decline in operating profit of 21%. While support and software license revenues fell flat from last year at €3.8 billion, cloud revenue was up 35% to €1.7 billion.
In its full year guidance, management stated that they believe adjusted operating profit will grow by 9.5% to 12.5%. They are committed to reaching their goal of margin expansion by 5 percentage points through 2023.
CEO, Bill McDermott, believes that operational performance is on track with 4-point expansion in gross margins for the cloud business. “As shown by our rising cloud gross margins, we are progressing nicely on our ambition to be the Best-Run SAP. With XM driving the CEO digital transformation agenda, we resolutely reaffirm our full year guidance,” he said.
Financial blogger, Gary Alexander said, “SAP remains one of the true value names among large-cap software stocks. Overall, SAP's cloud business continues to add recurring billings as it grows both organically and through M&A, while margins and cash flow are trending upward.”
Brian Schwartz, an Oppenheimer analyst with a 79% success rate and a 30% average return per rating, reiterated his Buy rating and $141 price target last month. His price target reflects his confidence in the company’s ability to rebound as well as his belief that share prices could rise by as much as 11% in the next twelve months.
The Street has mixed feelings about the last stock on the list. SAP has a ‘Moderate Buy’ analyst consensus and $138 average price target, suggesting 8% upside.