Over the past two decades, a growing number of companies have replaced their on-premise software with cloud-based subscription services. Those software-as-a-service (SaaS) solutions enable software companies to generate steady recurring revenues from their clients rather than relying on seasonal downtime. upgrade. They also benefit customers in growing businesses because it’s easier to scale those services across large numbers of devices.
Salesforce (CRM -1.30% ) at Service Today ( NOW -1.53% ) they both benefited from that secular trend. Salesforce, founded in 1999, is the largest provider of cloud-based customer relationship management (CRM) services. ServiceNow, founded in 2003, optimizes an organization’s digital workflows using its cloud-based tools.
Photo source: Getty Images.
Over the past five years, Salesforce’s stock has climbed more than 130% – but ServiceNow has delivered larger revenue of nearly 500%. Let’s take a look at why ServiceNow outperformed Salesforce and whether or not it will maintain that momentum and remain a stronger SaaS stock.
Which company is growing faster?
Between fiscal 2017 and fiscal 2022 (which ended this January), Salesforce’s annual revenue increased at a compound annual growth rate (CAGR) of 25.9% to $ 26.5 billion. Those steady returns were driven by the organic growth of its core CRM business and the inorganic expansion of its sales, marketing, e-commerce, and cloud analytics services.
Salesforce expects its annual revenue to exceed $ 50 billion in fiscal 2026, which will represent a CAGR of at least 17.4% over the next four years. It expects the steady growth of the CRM market and the expansion of its adjacent cloud services-which will serve to continue digitizing a wide range of industries-to push it toward that target.
ServiceNow’s annual revenue grew at a CAGR of 33.1% to $ 5.8 billion between fiscal 2016 and fiscal 2021 (corresponding to the calendar year). It greatly expanded its ecosystem with over a dozen acquisitions at the time and benefited from the growing demand for digital workflow services as companies relied more on remote and hybrid workers.
The company expects to generate more than $ 15 billion in annual revenue by 2026 – representing a CAGR of at least 20.9% over the next five years. In its last conference call, CEO Bill McDermott said the company’s “organic growth machine is in full flight” and no longer has to rely on additional mergers and acquisitions (M&A) for its future growth.
Which company is more profitable?
In addition to similar top-line growth, both companies generate comparable gross margins. Salesforce ended fiscal 2022 with a gross margin of 73%, down from 74% last year. ServiceNow’s gross margin also dropped one percentage point to 77% in 2021.
Unlike many other small SaaS companies, Salesforce and ServiceNow profit through generally accepted accounting principles (GAAP) and non -GAAP measures. However, ServiceNow continues to generate stronger non -GAAP revenue growth than Salesforce.
Over the past five financial years, Salesforce increased its non-GAAP earnings per share (EPS) to a CAGR of 36.5%, but ServiceNow’s non-GAAP EPS rose to a higher CAGR of 53.3%. Analysts expect that trend to continue.
|
Non-GAAP EPS Growth (Estimated) |
Current Fiscal Year |
Next Fiscal Year |
|---|---|---|
|
Salesforce |
(2.7%) |
24.1% |
|
Service Today |
24.3% |
26.7% |
Data source: Yahoo Finance, April 8. Author chart.
Salesforce revenues are expected to decline this year as it incorporates its latest acquisitions and faces tougher currency- and tax-related headwinds. ServiceNow does not have to deal with any near-term costs associated with procurement, and it does not face many challenges related to money or taxes.
But one of these SaaS stocks is more expensive
If we just look at their revenues, margins, and revenue, ServiceNow looks like a somewhat better investment than Salesforce.
However, ServiceNow stock is also trading at 79 times forward earnings and 14 times sales this year. Salesforce is trading at 47 times forward earnings and only six times sales this year. That’s a low price-to-sales ratio for a company that aims to nearly double its annual revenue over the next five years. For reference, Adobe – another SaaS peer that is growing at a slower rate than Salesforce- is trading at 12 times sales this year.
The winner: Salesforce
I like both of these SaaS stocks, but rising interest rates and other macroeconomic headwinds are likely to make stocks like ServiceNow more attractive than more reasonably priced ones like Salesforce. Therefore, I think it is safe for investors to buy some parts of Salesforce now, but they should wait for ServiceNow to cool down before pulling the trigger.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool counseling service. Let’s be motley! Asking an investing thesis – at least one of us – helps all of us think critically about investing and make decisions that will help us become smarter, happier, and richer.