Adobe (NASDAQ: ADBE) and Snowflake (NYSE: SNOW) stand as luminary firms in the cloud software domain, integrating AI advancements into their platforms with meticulous precision.
Adobe, renowned for its cloud-based digital media software suite, has propelled Firefly, an avant-garde generative AI tool, into the limelight. This tool, leveraging text-based cues, facilitates the creation of digital artwork and models while streamlining and automating tasks within its suite of cloud-based services.
Snowflake, on the other hand, specializes in gathering, refining, and warehousing data from diverse computing platforms in its data repositories for seamless accessibility by multiple applications. The introduction of their pioneering Cortex generative AI tools is targeted at enhancing the efficiency of data processing within their ecosystem.
Despite their cutting-edge developments, both companies have failed to attract bullish sentiments in the market this year. As of the latest figures, Adobe has witnessed a 17% decline in its stock value year-to-date, while Snowflake has grappled with a 23% stumbling block. Let’s delve deeper to ascertain if either of these underappreciated tech behemoths still holds promise for discerning investors.
Image source: Getty Images.
The Adobe Conundrum: Battling Competitors and Regulations
Over the past decade, Adobe executed a strategic pivot by transitioning its desktop applications into cloud-centric services. This astute maneuver not only secured a firm foothold in the digital media software domain but also nurtured a loyal subscriber base through recurrent billing cycles. Furthermore, this shift enabled the company to broaden its revenue streams by launching a plethora of cloud-based sales, marketing, and analytic services.
From fiscal years 2013 to 2023 (culminating on December 1, 2023), Adobe witnessed a commendable revenue surge, registering a compound annual growth rate (CAGR) of 17%. Concurrently, its earnings per share (EPS) ascended at a CAGR of 28%. However, projections for the period spanning fiscal years 2023 to 2026 are less robust, with market analysts anticipating a revenue upsurge at a CAGR of 11%, accompanied by an EPS escalation at a CAGR of 17%.
Despite its enduring growth trajectory, Adobe faces formidable competitive and regulatory hurdles. The emergence of Figma as a potent rival to Adobe XD in the UI/UX software design sector, the encroachment of Canva challenging Photoshop with its web-based editing tools, along with the evolving threat posed by Microsoft and its AI-driven Bing Image Creator and Designer platforms collectively place Adobe in a precarious position.
Last December, Adobe’s ambitious bid to acquire Figma for $20 billion was thwarted by antitrust regulators, culminating in a staggering $1 billion termination fee payout. Moreover, the company disclosed a probe by the U.S. Federal Trade Commission (FTC) concerning its subscription termination policies, hinting at potential monetary penalties or constraints on its subscription models.
Efforts to counter these headwinds through price hikes, cost reductions, and share buybacks might not suffice to invigorate Adobe’s stock performance. Trading at 28 times forward earnings, with insiders predominantly selling shares in the past year, Adobe struggles to present an irresistible investment proposition.
Snowflake’s architectural prowess lies in its ability to dismantle information silos within large enterprises, consolidating real-time data in centralized repositories. Departing from conventional subscription models, Snowflake adopts a usage-based fee structure, charging customers based on their storage and computational requirements.
Following its high-profile IPO in 2020, Snowflake captured investor attention with impressive growth rates. Product revenue, the primary revenue driver, recorded a notable compound annual growth rate (CAGR) of 69% from fiscal years 2021 to 2024.
Despite non-GAAP profitability in fiscal year 2022, Snowflake struggles to achieve GAAP profitability, with analysts projecting tepid revenue growth at a CAGR of 23% from fiscal years 2024 to 2026. This deceleration, attributed to macroeconomic headwinds impacting software expenditures, casts doubts on Snowflake’s ability to reach its ambitious target of attaining $10 billion in annual product revenue by fiscal year 2029, necessitating a robust 30% CAGR over the six-year period starting from fiscal year 2024.
The abrupt departure of CEO Frank Slootman, who unveiled the audacious revenue goal during an investor conference in 2022, adds another layer of uncertainty regarding Snowflake’s trajectory. Trading at over 200 times forward earnings and 15 times current sales, with insiders offloading shares at a swift pace, Snowflake’s valuation appears stretched.
The Pivotal Decision: Choosing Between Adobe and Snowflake
While reservations linger around both Adobe and Snowflake, the former appears marginally more attractive than its counterpart. Challenged as it may be, Adobe’s robust market presence, tempered by its defensive strategies, presents a glimmer of promise amidst the storm.
Investors, cautioned to exercise prudence amidst market turbulence, must scrutinize the performance of Adobe and Snowflake diligently. Should Adobe address its looming challenges and exhibit resilience in the face of competition and regulations, it could emerge as a compelling investment opportunity. In contrast, Snowflake must demonstrate sustained product revenue growth and tangible progress towards profitability to warrant serious investor consideration.
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Leo Sun holds no positions in the stocks discussed. The Motley Fool has vested interests in and recommends Adobe, Microsoft, and Snowflake. Additionally, The Motley Fool recommends long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool upholds a stringent disclosure policy.
The opinions expressed herein represent the views of the author and do not necessarily reflect those of Nasdaq, Inc.
