Buy Adobe Systems Incorporated Stock Before the Big Rebound

The rotational trade that killed big-growth tech stocks recently appears to be over, but many of those stocks have yet to fully recover. One such big-growth tech stock which was particularly damaged in this recent sell-off was Adobe Systems Incorporated (NASDAQ:ADBE), but that’s a good sign for the ADBE stock future.

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The steady grower had just gone parabolic, shooting up from $150 to over $185 in just over a month after blowout fiscal 2018 earnings guidance was delivered at the company’s analyst day. Naturally, when big-growth tech got hit, Adobe stock was subject to sizable losses given its recent run.

Those sizable losses materialized in the form of a 10% haircut in ADBE stock price in about a week. The stock has bounced back some, but it is still trading at just $174 versus a $185 high about a month ago. Will this rebound in ADBE stock continue? Can the stock get back to $185?

Yes and yes. The rebound in Adobe stock can continue. And this stock won’t just get back to $185, but should head far above that level.

Adobe Is A Very Strong Company

I’ve been bullish on Adobe stock for a while. The company is a one-stop shop for creative professionals. They are successfully adapting to today’s cloud world where solutions are digitally delivered. More and more solutions continue to migrate to the cloud.

Competition is muted and the solutions are quite powerful, giving ADBE significant pricing power over consumers. Indeed, prices are going to come up next year. Margins are expanding. Secular tailwinds are in place for robust growth into the foreseeable future. There really isn’t anything not to like about this growth narrative.

But the best thing to like about ADBE is that the company strategically dominates a very valuable and growing content editing solutions market. Adobe isn’t a monopoly, but they are certainly the only name any average Joe would recognize in this marketplace.

Just check out this list or this list of Adobe Photoshop alternatives. None of them are household names, nor are any of them formidable competitors to Adobe. Adobe is the only viable solution for creative professionals.

The best evidence of this dominance is Adobe’s explosive growth in its subscription business. Adobe users were initially quite angry when Creative Suite went all-cloud, all-subscription in 2013. That meant consumers would have to pay fees into perpetuity to use something that formerly was just a one-time cost.

But users got over that anger because there was no other product out there that rivaled Adobe’s Creative Suite. Creative professionals started paying the recurring fee, and never stopped paying it. Adobe’s subscription revenues have grown by more than five-fold over the past four years.

The same thing is happening across all aspects of ADBE’s business, from the Creative Cloud to the Document Cloud to the Experience Cloud. In each of these business, revenues are soaring because Adobe offers unparalleled solutions in an increasingly digitally-connected, visual-first, data-driven world.

ADBE Is A Very Strong Stock

Just as Adobe is a very strong company, ADBE is a very strong stock. The stock is on a strong upward trend. Any breaks in that trend have been short-lived – ADBE stock always bounces back quickly and strongly.

For example, any time ADBE stock dips below its 50-day exponential moving average, the stock has rebounded with ferocity. See late October 2017, late September 2017, early July 2017 and early December 2016.

It was the same thing with weakness in the RSI indicator. Any time the RSI has fallen below 50, the stock has bounced back. See the same dates. Amid the recent sell-off, Adobe stock broke below its 50-day exponential moving average while the RSI dipped to below 40. Yet again, it bounced back.

In other words, this is a very strong stock with a lot of upward momentum. It will take a lot to reverse this momentum, but right now, all that is happening is that ADBE’s underlying growth story is strengthening (2018 EPS estimates were at $4.80 at the beginning of this year; now they are at $5.51).

Therefore, ADBE stock is rebounding. And will continue to rebound.

Bottom Line on ADBE Stock

Earnings at ADBE are expected to grow 25% per year over the next 2 years. The S&P 500 is expected to grow earnings at a 10% clip over the next 2 years.

The S&P 500 is trading at 20x this year’s earnings, or double growth. Adobe stock easily deserves the same premium, implying a “fair” price-to-earnings multiple of 50.

A 50x multiple on this year’s $4.22 earnings estimate implies a fair value of about $210. That implies another 20% upside until this stock is fairly valued.

As of this writing, Luke Lango was long ADBE.

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