Stick With Adobe Systems Incorporated (ADBE) Stock as the Cloud Grows

Shares of Adobe Systems Incorporated (NASDAQ:ADBE) popped on Wednesday after the company reported better-than-expected quarterly numbers. But despite the fact that you’d be chasing ADBE stock, I think this is a buying opportunity into a high-growth, big-moat name.

Stick With Adobe Systems Incorporated (ADBE) Stock as the Cloud Grows

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Investors let shares pull back a bit after their initial morning burst. Maybe that’s investor complacency. Adobe beat the Street, but that’s nothing new. In fact, it has been about three years since ADBE  missed either a top or bottom line quarterly estimate. So maybe investors had already priced in the better-than-expected quarter.

But that’s all just near-term noise. In a long-term window, the result of Adobe’s consistent financial outperformance has been staggering stock price outperformance. ADBE stock has nearly quadrupled since the start of 2013.

The company’s recent results, coupled with secular market trends, indicate that this stock price outperformance will continue.

Adobe Is Primed for Big Growth

Over the past few years, multiple big-moat tech giants like Microsoft Corporation (NASDAQ:MSFT) and Adobe have tried to transition their business models to adjust to today’s cloud-based tech world. That transition primarily includes replacing CDs and antiquated installation processes with higher-margin, cloud-hosted services.

Both have been successful, but ADBE has been particularly successful.

Why? Because almost without argument, Adobe is the king in its space. And its space will always require the solutions Adobe provides.

Creative professionals have needed, currently need and will always need creative tools. Adobe provides those solutions, and has seamlessly transitioned those solutions into cloud-based offerings. It leverages big-moat technology like artificial intelligence and machine learning to deliver these solutions, so there really isn’t much concern over competition.

The financial results have been and will continue to be impressive.

Adobe’s revenues jumped 27% in the quarter, and remain on track to hit management’s target of 20% growth per year into 2018. Earnings grew over 40%, and also remain on track to hit management’s 30%-plus growth target. Cash flow popped over 30%, and likewise will hit management’s 25% annualized multi-year growth target.

Those are some big growth numbers, and I don’t really see much risk. As stated earlier, creative professionals will always need creative solutions, so market demand isn’t an issue. That means all eyes should turn toward competition, but even that isn’t an issue given Adobe’s overwhelming presence in the creative solutions space.

With consistently high market demand and without major competition, Adobe had a long runway for big growth ahead of it.

What to Do With ADBE Stock

There is a lot of growth in this name, and the value the company is creating is protected by a thick moat. Understandably, investors should pay a premium for that quality of growth.

But ADBE stock actually trades at a very reasonable valuation. Right now, you’re looking at a multiple of about 54 times trailing earnings, but 28 times forward earnings. Profits, meanwhile, are up about 44% both this quarter and fiscal year to date, and are expected to grow another 25% next year.

So while Adobe shares aren’t exactly cheap in a bubble, you’re paying for quality. And when compared to the rest of the market, which is richly valued against far lesser growth potential, ADBE looks downright cheap.

Even in this lofty market, Adobe looks like a good place to hang out.

As of this writing, Luke Lango was long ADBE.

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