The growing dependence of enterprises on software solutions has positioned the industry for substantial expansion. Technological advancements are further bolstering it by fostering innovation, refining development processes, and facilitating the crafting of immersive, interconnected experiences.
In this context, I've evaluated two software stocks, Salesforce, Inc. (CRM) and MongoDB, Inc. (MDB), to ascertain which holds the potential for superior returns. Let’s understand this in detail.
This year and beyond, the software industry anticipates robust growth as businesses prioritize investments in software-driven transformation initiatives to attain a competitive advantage through heightened productivity and automation.
The standout trend in the industry is the accelerated adoption of cloud-native solutions by software development companies. These solutions empower application development, team management, and communication, functioning seamlessly across diverse servers, ensuring effortless integration for any organization.
Gartner, Inc. (IT) foresees a 21.7% surge in global end-user spending on public cloud services, projected to reach $597.30 billion in 2023, a substantial rise from the $490.98 billion in 2022. It also envisions that by 2026, 75% of organizations will embrace a cloud-centric digital transformation strategy as their core foundational platform.
Furthermore, technologies like AI, cybersecurity, blockchain, software outsourcing, and IoT are propelling the industry's growth by fueling innovation, bolstering security protocols, streamlining development processes, and unlocking the potential for immersive, interconnected experiences.
Looking ahead, the global enterprise software market is poised to grow at a CAGR of 11% and reach $519.88 billion by 2030, as projected by Spherical Insights.
Regarding price performance, CRM declined 9.8% in the past month, while MDB plunged by 15.6% during the same period. Furthermore, over the past three months, CRM witnessed a 5.6% drop, while MDB has plummeted by 19.4% over the same duration.
However, CRM has gained 1.7% over the past six months, closing the last trading session at $199.83, whereas MDB has surged by 46.2% during the same period, reaching a closing price of $331.61 in the last trading session.
But which Software - Application stock could be a better pick? Let’s find out.
Recent Developments
On September 12, CRM and Google extended their partnership to introduce bidirectional integrations enabling customers to merge CRM and Google Workspace data, boosting generative AI experiences. This synergy is expected to increase CRM's user base, enhance product offerings, and drive revenue growth.
On September 26, MDB launched MongoDB Atlas for the Edge, facilitating applications' deployment near real-time data sources across devices, on-premises centers, and major clouds. This would ensure secure, real-time data synchronization for robust applications, MDB could benefit from increased demand, market reach, and subscription growth.
Recent Financial Results
For the fiscal 2024 second quarter that ended July 31, 2023, CRM’s total revenues increased 11.4% year-over-year to $8.60 billion. Its non-GAAP income from operations rose 77.1% from the year-ago value to $2.72 billion.
In addition, the company’s non-GAAP net income and non-GAAP net income per share grew 76% and 78.2% from the prior year’s period to $2.09 billion and $2.12, respectively.
For the fiscal 2024 second quarter that ended July 31, 2023, MDB’s non-GAAP gross profit grew 47.4% year-over-year to $328.97 million. Its non-GAAP income from operations came in at $79.12 million, compared to $12.43 million in the previous year’s period.
Also, the company’s non-GAAP net income came in at $76.71 million, compared to a net loss of $15.55 million in the previous year’s quarter. However, the company also registered a cash outflow from investing activities of $110.20 million, compared to a cash inflow of $224.92 million in the prior year’s quarter.
Past and Expected Financial Performance
Over the past three years, CRM’s revenue and EBITDA increased at CAGRs of 19.5% and 40.5%, respectively. During the same period, the company’s total assets and levered free cash flow grew at a respective CAGRs of 17% and 21.4%.
Analysts expect CRM’s revenue to grow 10.9% year-over-year to $34.78 billion for the fiscal year ending January 2024. In addition, the company’s EPS for the current year is estimated to rise 53.3% from the prior year to $8.03. Moreover, CRM topped consensus revenue and EPS estimates in all four trailing quarters, which is impressive.
Over the past three years, MDB’s revenue grew at a CAGR of 43.7%. In addition, the company’s total assets and levered free cash flow surged at a CAGR of 25% and 46.5%, respectively, over the same period.
The consensus revenue estimate of $1.61 billion for the fiscal year ending January 2024 reflects a 25.5% year-over-year improvement. Likewise, the company’s EPS for the ongoing year is estimated to come in at $2.35, up 190.5% from the previous year. Also, it surpassed the consensus revenue estimates in all four trailing four quarters.
Valuation
In terms of trailing-12-month non-GAAP P/E, CRM is currently trading at 29x, 80% lower than MDB, which is trading at 144.81x. Moreover, CRM’s trailing-12-month Price/Sales multiple of 5.94 is 61.9% lower than MDB’s 15.58. Additionally, CRM’s trailing-12-month EV/Sales of 5.92x compares with MDB’s 16.30x.
Profitability
CRM’s trailing-12-month revenue is 22.2 times that of what MDB generates. Moreover, CRM is more profitable, with a trailing-12-month levered FCF margin of 31.95%, compared to MDB’s 11.93%. Moreover, CRM has a trailing-12-month cash from operations of $8.40 billion compared to MDB’s $48.56 million.
Additionally, CRM’s trailing-12-month EBITDA margin and net income margin are 23.30% and 4.77%, respectively, compared to MDB’s EBITDA margin of negative 16.98% and net income margin of negative 16.21%.
POWR Ratings
CRM has an overall rating of A, which equates to a Strong Buy in our proprietary POWR Ratings system. Conversely, MDB has an overall rating of C, translating to a 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 Quality, justified by its high profitability. The stock’s trailing-12-month gross profit margin and CAPEX/Sales of 74.52% and 2.54% are 52.7% and 4.8% higher than the industry average of 48.82% and 2.42%, respectively.
Whereas MDB has a C grade for Quality, consistent with its mixed profitability. Its trailing-12-month gross profit margin of 74.07% is 51.7% higher than the industry average of 48.82%. However, the stock’s trailing-12-month CAPEX/Sales of 0.23% is 90.7% lower than the 2.42% industry average.
In addition, CRM has a C grade for Stability, justified by its 24-month beta of 1.56. On the other hand, MDB has a D grade for Stability, in sync with its 24-month beta of 2.29, which is significantly higher than the broader market.
Of the 133 stocks in the Software - Application industry, CRM is ranked #10, while MDB is ranked #66.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Value, Momentum, and Sentiment. Click here to view CRM’s ratings. Get all MDB ratings here.
The Winner
Leading software stocks CRM and MDB are poised to benefit from the industry's growth, driven by digitization, cloud reliance, and software solution demand. However, given CRM's stronger financial performance, lower valuation, and higher profitability, it appears to be a more favorable investment than MDB at this moment.
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 $202.26 per share on Wednesday afternoon, up $2.43 (+1.22%). Year-to-date, CRM has gained 52.55%, versus a 12.08% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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