Summary
Adobe is an incredibly profitable growth machine. It also has an undisputed long-term uptrend bias.
We have consistently taken the opportunity to add the stock at its major dips. Those opportunities in May and October have proven to be rewarding.
We discuss whether Adobe stock is still a buy now.
This idea was discussed in more depth with members of my private investing community, Ultimate Growth Investing. Learn More »
bennymarty/iStock Editorial via Getty Images Investment Thesis
Adobe Inc. ( ADBE ) operates an incredibly profitable and resilient business model. It’s also a wide moat business with no close competitors, especially in its creative cloud business. Despite reporting a solid set of results in FQ3, the market sold the stock off.
Moreover, the stock also joined the rest of the market in the September/October retracement. Members in our service managed to capitalize on the retracement and added the stock. At one point in early October, ADBE stock was down almost 18% from its all-time high (ATH). We have managed to ride the way back up since those bottoming days in October.
ADBE is also a solid stock. It has an undisputed long-term uptrend bias. We have always taken the opportunity to add the stock at significant dips. In the recent May dip, we also encouraged readers to add the stock . The stock has been up 31.2% since the article was published.
Given the stock’s incredible recovery from its October bottom, we discuss whether it is still a buy now. Adobe Reported Solid (But Not Great) Results in FQ3’21
Adobe delivered a solid FQ3 report card. Despite that, we think the results were broadly in line with expectations. ADBE revenue surprise (quarterly). Source: Seeking Alpha ADBE EPS surprise (quarterly). Source: Seeking Alpha
While revenue and EPS surprised on the upside, we think they were not fantastic beats. Coupled with a relatively expensive valuation before the earnings release, investors might have been expecting more. Nevertheless, we believe it isn’t meaningful to determine why market participants (especially institutional investors) chose to sell. It’s a waste of time. We should instead focus on whether Adobe’s fundamental thesis remains intact. And if it is, then we will pay attention to its valuations and whether lower-risk entry points are present. That will determine whether we think the opportunity in Adobe stock is timely and actionable. Adobe Creative Cloud and Document Cloud. Source: Adobe Adobe Experience Cloud, Publishing & Advertising. Source: Adobe
Members can quickly glean the scale of Adobe’s business. We are pretty sure that most of us have used at least one of their products before. Members in the digital media or design industries would likely use many of their products in their daily work. Adobe Creative Cloud is their most important segment, and it’s also their core segment. We believe that Adobe is so dominant in this segment that they have no close rivals. Computer graphics and photo editing software market share worldwide in 2021. Data source: Enlyft Computer graphics application software market volume worldwide from 2018 to 2024. Data source: Jon Peddie Research
Members can easily glean Adobe’s leadership prowess above. In its creative cloud segment, they have a “stranglehold” in the market. It leaves its smaller competitors to feed off scraps. The second chart shows the market opportunity for Adobe’s Creative Cloud. The market is expected to grow at a CAGR of 6.9% over the next four years.
However, Adobe has been growing much faster. As we shall observe below, it’s also estimated to continue growing faster than the market. In addition, Adobe has an incredible monetization machine. Therefore, it isn’t very smart to bet against this company. [ADBE, ADSK, CRM] last twelve months [LTM] EBIT margins. Data source: S&P Capital IQ
ADBE also reported a fantastic LTM EBIT margin of 36.5%. Its consistently strong EBIT margins are way superior to Salesforce’s ( CRM ) and Autodesk’s ( ADSK ) margins. CRM and ADSK reported LTM EBIT margins of 4.9% and 16.5%, respectively. It demonstrates the tremendous pricing power of Adobe’s very sticky Software-as-a-Service (SaaS) business model. Selected Leading SaaS players’ annual recurring revenue (ARR). Source: atom finance
Members can easily glean the clear revenue runway that ADBE and CRM generate. Their core products are so sticky that it’s almost “unthinkable” to switch to a lesser platform. As a result, both also report massive ARRs. No other player comes close. Adobe Creative Cloud and Document Cloud ARR. Data source: Company filings
Take a look at Adobe’s gangbusters ARR growth. Its core Creative […]
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