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SUMMARY
Parkev Tatevosian, CFA, evaluates ServiceNow and Adobe, two major technology companies whose stocks have declined amid investor concerns about artificial intelligence. The analysis compares their revenue growth, profitability, valuation, and management stability to determine which presents a more compelling investment opportunity.
MAIN POINTS
- ServiceNow and Adobe are both experiencing declining stock prices due to investor concerns about artificial intelligence, prompting a comparison of their investment potential.
- ServiceNow has shown stronger improvements in cash flow from operations to sales, while Adobe maintains higher overall profitability and return on invested capital.
- Adobe is trading at roughly one-third the forward price-to-earnings valuation of ServiceNow, reflecting heightened investor caution about its future.
- Discounted cash flow models indicate both Adobe and ServiceNow are significantly undervalued compared to their current market prices.
- ServiceNow benefits from stable and highly regarded management, while Adobe faces uncertainty due to recent executive departures.
- Despite both stocks being undervalued, Adobe is favored by a small margin, though both are considered strong portfolio additions.
DETAILED ANALYSIS
ServiceNow and Adobe have both seen their share prices decline as investors worry about the impact of artificial intelligence on their business models. Despite these concerns, ServiceNow has consistently outperformed Adobe in revenue growth over the past several years, with Wall Street analysts projecting ServiceNow to maintain a revenue growth rate near 20% annually, more than double Adobe's expected 10%. However, Adobe remains the larger company by total revenue.
In terms of profitability, Adobe leads in return on invested capital, recently achieving nearly 40%, which is more than triple ServiceNow's latest figure. Both companies have improved their cash flow from operations to sales ratios, with ServiceNow making significant strides from 8% in 2017 to 39% recently, while Adobe improved from 35% to 41.6% over the same period.
Valuation metrics reveal a stark contrast: Adobe trades at a forward price-to-earnings ratio of about 8.2, the lowest in its recent history, while ServiceNow trades at 23.6, still a record low for the company but three times higher than Adobe. This premium for ServiceNow reflects its superior growth prospects, but questions remain about whether such a high multiple is justified. Discounted cash flow analysis suggests both stocks are undervalued, with Adobe's fair value estimated at $380 per share versus its current price near $200, and ServiceNow's fair value at over $158 compared to a market price of $97.
Management stability is another differentiator; ServiceNow is led by a highly regarded CEO, while Adobe is experiencing leadership turnover with both its CFO and CEO departing, creating uncertainty about its future direction.
Ultimately, while both companies are considered excellent businesses trading at attractive valuations, Adobe is favored slightly due to its stronger profitability and deeper undervaluation, despite the recent management changes. Both stocks are viewed as strong candidates for long-term investors seeking opportunities among beaten-down growth stocks.
LINKS
- Special offer for The Motley Fool Stock Advisor.
- Parkev Tatevosian's book on evaluating publicly traded companies.
- Discounted access to Fiscal.ai for investment research.
- Webull sign-up with bonus shares offer.
- Subscribe to Parkev Tatevosian's free monthly Substack newsletter.