Salesforce (CRM 1.68%) and ServiceNow (NOW 1.62%) both help large companies streamline operations with their cloud-based services. Salesforce is the world's largest provider of cloud-based customer relationship management (CRM) services, while ServiceNow is the market leader in cloud-based digital workflow offerings.
Salesforce and ServiceNow aren't usually considered direct competitors. However, Salesforce also provides digital workflow tools via its Service Cloud, and it's been expanding its ecosystem with more marketing, analytics, and collaboration services.
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Salesforce generated nearly 4 times as much revenue as ServiceNow in its latest fiscal year. But the larger company is also growing at a slower clip and impressing fewer investors. Over the past 12 months, ServiceNow's stock has rallied more than 30%, while Salesforce shares only rose 12%. Let's dig deeper and see whether that trend will continue.
Salesforce's business is maturing
From fiscal 2018 to fiscal 2023 (which ended in January 2023), Salesforce's revenue increased at a compound annual growth rate (CAGR) of 24%. That was partly driven by its massive acquisitions of Mulesoft, Tableau, and Slack.
But in fiscal 2024, Salesforce's revenue only rose 11%. That deceleration was caused by three major challenges. First, macro headwinds drove many companies to rein in cloud spending. Second, it faced stiff competition from smaller CRM competitors like Microsoft Dynamics. Finally, activist investors pressured Salesforce to cut costs, buy back more shares, and pause its big acquisitions.
For fiscal 2025, analysts expect Salesforce's revenue to only climb 9%. That slowdown coincides with the rise of generative AI platforms over the past year, which raises a red flag because it suggests that some of its offerings might be displaced by new AI services. Salesforce has been rolling out its own generative AI tools to keep pace with that shift, but those efforts aren't meaningfully boosting its revenue yet.
On the bright side, Salesforce's adjusted EPS rose 57% in fiscal 2024 as it executed several rounds of layoffs, aggressively cut costs, and plowed its cash into big buybacks. Those profit-boosting moves appeased its activist investors, and the company even initiated its first dividend earlier this year. Analysts expect its adjusted EPS to jump 20% in fiscal 2025.
Salesforce is still growing, but its business is maturing. Its stock might seem reasonably valued at 24 times forward earnings and 6 times this year's sales, but it probably won't command a higher valuation unless its top-line growth accelerates again.
ServiceNow is still firing on all cylinders
From 2017 to 2022, ServiceNow's revenue increased at a CAGR of 30%. Most of that growth was organic, and it didn't make any multibillion-dollar acquisitions like Salesforce. It also hasn't been executing any big layoffs.
In 2023, ServiceNow's revenue climbed 24%. Macroeconomic headwinds throttled growth as the company struggled to lock customers into longer contracts and higher-value deals, but it suffered a milder slowdown than Salesforce and many of its other industry peers. ServiceNow is growing at a faster clip because many companies are still optimizing and automating their digital workflows to cut costs in a more challenging environment.
For 2024, ServiceNow forecasts subscription revenue (which accounts for most of its top line) to increase 21.5% on a constant currency basis. Analysts expect its reported revenue and adjusted EPS to grow 21% and 25%, respectively.
Looking ahead, ServiceNow believes its near-term growth will be driven by the federal sector and its Now Assist AI platform, which uses generative AI tools to optimize its digital workflows. During a recent conference call, CEO Bill McDermott declared that "ServiceNow's strategic relevance as the AI platform for business transformation has never been higher."
ServiceNow projects to generate at least $15 billion in revenue in 2026, which would represent a CAGR of more than 20% from 2023. That's a rosy outlook, but its stock isn't cheap at 52 times forward earnings and 13 times this year's sales. The company launched its first stock buyback plan last year, but it doesn't pay a dividend.
The better buy: ServiceNow
Salesforce might be the cheaper stock, but ServiceNow remains the better overall investment because it is growing faster, faces fewer near-term headwinds, and has a clearer plan for the generative AI market. It also runs a tighter business, isn't heavily dependent on acquisitions, and doesn't face any pressure from activist investors.
