Why patient investors should watch Adobe’s decline
Sometimes a long-established company has their engine running on all cylinders, but their stock just spits out. Adobe (NASDAQ: ADBE) released another strong earnings report on September 21, but investors apparently wanted more. The stock has since fallen more than 10%, perhaps creating an entry point for more patient investors looking more to the future.
Adobe posted record third quarter revenue of nearly $ 4 billion, marking 22% annual growth. Net revenue rose nearly 27% to over $ 1.2 billion from the same quarter last year. The company also forecast strong results for the fourth quarter and is repurchasing its own shares. It repurchased 1.7 million shares in the third quarter as part of a plan to repurchase up to $ 15 billion in shares through 2024 – a plan that shows management’s commitment to support the company’s stock price.
Robust in the cloud
Investors focused on the stock’s recent pullback should not lose sight of where Adobe was at. The San Jose, Calif., Software maker founded in 1982, created the tools used in the digital media space today, from Photoshop, Illustrator, and the Simple Portable Document Format, or PDF, to platforms of cloud-based video collaboration.
The company boasts that 90% of the world’s creative professionals use Photoshop and that people opened more than 300 billion PDF documents last year.
The company is divided into three main segments:
- Creative Cloud, offering products for photography, video, animation and design.
- Document Cloud, providing solutions to create, edit, share, scan and sign secure digital documents.
- Experience Cloud, which includes content management, personalization, data analytics, and e-commerce.
Note the keyword here: “cloud”. Adobe has moved its industry standard products to the cloud, which ensures recurring revenue through subscriptions, eliminates software piracy and lost revenue, and solidifies Adobe’s place in an increasingly digital future.
The company’s products are deeply rooted in a growing field of digital marketers, designers and content creators. It has a wide economic divide around its business, keeping its competitors at bay, as it is always a big and unwanted challenge for users to change and learn new products.
And Adobe’s products are very profitable. The company has a net margin of over 38% and a return on equity of nearly 45%.
Downstairs, but not outside
Adobe stock is down more than 14% from the all-time high reached on September 3. But it is still up more than 12% since the start of the year.
It has a 12-month rolling price-to-earnings ratio of 46, which is reasonable compared to other successful software giants. Selling power (NYSE: CRM), for example, has a PE greater than 105, and Intuit (NASDAQ: INTU) has a PE of nearly 70.
Adobe’s bearish case is simply that its stock was listed for knockout performances, and has now retreated, even in the midst of that knockout performance. The company also generally faces softer market conditions during the seasonally more difficult September and October.
Plus, the stock was arguably expensive at its high, and many investors likely followed the proven strategy of selling on the good news. For many investors, the stock can still seem expensive. But it’s important to remember that Adobe stocks have long been highly valued. After all, it’s about delivering software with a high margin. Some bearish critics also note that the once rapid growth of Adobe’s software as a service offerings is starting to slow.
Adobe further acknowledges that its business continues to be hampered by the pandemic. For example, his conference and events have all been virtual, where they were in person before COVID-19.
Worthy of consideration
Overall, however, Adobe offers a solid company with a long history of success in an industry full of failures. It has shown for several decades that it can adapt and even thrive in an industry in perpetual upheaval. Adobe has been developing for a long time, and it will likely continue to grow in the years to come, with a total addressable market estimated to reach $ 147 billion by 2023.
Additionally, Adobe’s largest business remains authoring software, and almost all of this segment’s revenue comes from subscriptions. This stabilizes revenue and makes business forecasts predictable. Analysts expect Adobe’s revenue to grow 18% per year over the next five years.
Adobe has proven to be a smart game for the patient investor, and its recent decline may be a good time to buy.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.