Its a red day for the market, but one stock bucking that trend is Adobe Systems Incorporated (NASDAQ:ADBE). The one-stop shop for creative professionals delivered preliminary fiscal 2018 guidance that was well above analyst estimates. Management expects earnings per share to be about $5.50, nearly 6% above where the Street was sitting ($5.20). The strong guide has ABDE stock up almost 12% on Thursday.
While I’m not one to usually chase rallies, I think ADBE stock is in the middle of a secular bull run. As the company has successfully transitioned to a cloud and subscription service-based business model, ADBE stock has taken off. It has climbed from $34 about five years ago to nearly $170 today, and the trajectory has looked like a straight-line with mitigated volatility.
It has climbed from $34 about five years ago to nearly $170 today, and the trajectory has looked like a straight line with mitigated volatility.
Why? Because Adobe is the king of its space and has very little formidable competition. With ADBE stock, then, you get all the rewards of secular cloud growth and high-margin and predictable recurring revenue streams, but none of the competitive risks that could unnaturally slow revenue growth or chip away at margins.
It’s a big reward, small risk narrative.
Investors will keep buying that narrative up. ABDE stock can and will head higher into the foreseeable future.
Adobe Is On Fire
Whereas many of yesterday’s tech giants have struggled in today’s dynamic marketplace, Adobe has flourished.
The company has proven itself to be exceptionally nimble and dynamic as the demands of its end-consumers have changed over time. The company has successfully migrated to a cloud and subscription service-based business model that has three big pillars: Creative Cloud, Document Cloud and Experience Cloud.
All three of these businesses are booming.
The Creative Cloud business is benefiting from a secular shift toward a visual-heavy world. Picture-heavy social media apps like Snap Inc (NYSE:SNAP) and Instagram are in. Word-heavy social media apps like Twitter Inc (NYSE:TWTR) are out. This consumer shift from words to pictures is upping demand for professional visual content creators while simultaneously creating a whole new class of amateur visual content creators. That is why growth rates in this business are consistently north of 30%.
The Document Cloud business is benefiting from the secular shift toward digital documents. Paper businesses are increasingly digitized due to cost-savings, environmental friendliness and the advancement of cloud-hosted technologies. As this shift accelerates, Adobe’s Document Cloud business will continue to roar higher. Revenues here are growing in the 10%-plus range.
The Experience Cloud business is benefiting from the secular shift toward leveraging data to deliver enhanced customer experiences. As companies continue to leverage data to deliver more personalized customer experiences, Adobe’s Experience Cloud will continue to grow. Revenues in this segment grew 26% in the previous quarter.
All in all, Adobe finds itself on the right side of many secular shifts. Plus, there really isn’t much competition in this space because Adobe is so dominant. Mitigated competitive risks coupled with exposure to secular growth markets make ADBE stock very attractive.