Adobe Systems Incorporated (NASDAQ:ADBE) stock just experienced one of its sharpest downturns in recent memory after the company reported stellar third quarter results and guided strongly for the fourth quarter. Consider this selloff in ADBE stock a gift.
Adobe is a secular growth stock. The ADBE stock price is up nearly 50% this year and has more than quadrupled over the past five years. The company is firing on all cylinders, as tailwinds in its multiple cloud businesses are starting to converge.
And now, ADBE stock is more attractively valued than the market.
What’s the big takeaway? This is an opportunity to buy ADBE stock while its on sale.
ADBE Stock and the Creative Cloud
The best thing about the Adobe growth story is that you get multiple secular growth stories at the same time.
Adobe is king in the creative content world. No one really comes close to Adobe’s Creative Cloud in terms of offering a one-stop shop for creative professionals to create, edit and amplify visual content. But market dominance alone doesn’t explain Creative Cloud growth rates, which are consistently north of 30%.
The critical trend at play here is the growth in visual mediums and creative amateurs. Think about the biggest growth stories in social media right now. It’s essentially a two-horse race between Instagram and Snap Inc. (NYSE:SNAP). Those are both visual-heavy. Think about the biggest loser in social media right now. That spot is reserved for Twitter Inc (NYSE:TWTR), which is a word-heavy platform.
We are seeing this massive shift from words to pictures and videos. Moreover, we are seeing that the process of creating appealing visual content is being democratized. Now, anyone can do it.
Who wins big in those shifts? One of the winners is Adobe because it provides the framework and tools for creating appealing pictures and videos. The more visual content there is and the more visual content creators there are, the more demand will rise for Adobe’s Creative Cloud.
ADBE Stock and the Document Cloud
Adobe is also king in the digital documents world, which is yet another secular growth space.
Paper businesses worldwide are being digitized. The reasons for this include cost saving, environmental friendliness and the advancement of cloud-hosted technologies. The use of digital documents is on the rise, hence Adobe Document Cloud growing revenues by 10% last quarter.
This growth story won’t slow down anytime soon. Consider this. One of the fastest-growing parts of Microsoft Corporation (NASDAQ:MSFT) is Office 365. It’s essentially the cloud version of Microsoft Office, so as cloud adoption increases, Office 365 will continue its robust growth trajectory.
Adobe Sign is Microsoft’s preferred e-signature method solution across the company’s portfolio, and that includes Office 365. Thus, as Office 365 grows with the macro cloud growth story, Adobe Sign will also grow.
From this standpoint, its clear that Adobe’s Document Cloud business is a pure play on cloud growth. The more data and documents move to the cloud, the more demand will rise for Document Cloud.
Bottom Line for ADBE Stock
Beyond Creative Cloud and Document Cloud, there is Adobe’s Experience Cloud (designed for businesses to optimize customer experiences). That business is also booming, as revenues jumped 26% higher last quarter.
With ADBE stock, you get multiple secular growth stories wrapped into one, and you get them at a big discount.
ADBE stock trades at 35.5 times this year’s earnings estimate. Earnings growth from 2017 to 2019 is pegged at 22%. That setup gives ADBE stock a price-to-earnings/growth (PEG) ratio of about 1.6.
The S&P 500 trades at 19.4 times this year’s earnings estimate. Earnings growth from 2017 to 2019 is pegged at 10.6%. That setup gives the S&P 500 a PEG ratio of about 1.8.
Overall, ADBE stock gives investors more bang for their buck than the S&P 500. Consequently, I’m buying ADBE stock on this dip and see a pretty big upside opportunity in a near-term window.
As of this writing, Luke Lango was long ADBE.
