One of the stock market’s brightest stars over the past several years has been creative solutions giant Adobe (NASDAQ:ADBE). From late 2013 to late 2018, Adobe stock rose by more than seven-fold from under $40 to nearly $280. Perhaps more impressive, it did so with relatively muted volatility. During that stretch wherein shares rose 600%, Adobe fell into bear market territory only once.
But, Adobe stock has fallen flat lately. Specifically, the late 2018 market-wide selloff hit Adobe stock hard, as it did all high-flying stocks. ADBE dropped 25% off recent highs — it’s biggest correction since 2012.
To be sure, shares have rebounded from that selloff. But, Adobe stock’s 200-day moving average is flattening out for the first time in five years. Some investors are concerned that this flattening is a sign that the best is over for Adobe.
That thesis is flawed. The best is not over for Adobe stock. The reality is that Adobe is an innovative company attacking some very big secular growth markets. Adobe has huge advantages in those markets, and as such, projects to be a much larger company in the future than it is today. So long as Adobe remains on that secular growth track, ADBE will head higher, despite its ostensibly large valuation.
As such, recent weakness in the stock is nothing more than noise. This stock remains a long-term winner, powered by robust secular growth tailwinds.
Cloud Market Leadership
When it comes to Adobe, the narrative is focused on three business: Document Cloud, Creative Cloud and Experience Cloud. All three businesses are high-margin, high-growth businesses immersed in significantly larger addressable markets supported by secular growth trends. Adobe also has a big advantages in each of those markets. As such, all three businesses project to one day be much larger than they are today.
Document Cloud provides market-leading solutions that are used to create, edit, and amplify next-generation digital documents. The total addressable market is estimated at $7.5 billion, according to Adobe management.
Secular trends imply that this market will only get bigger with time, as the world, particularly enterprises, becomes more digitally dependent than ever before. Competition is also muted, as Adobe essentially owns the PDF world. Thus, Document Cloud projects as a big growth business for a lot longer.
In the Creative Cloud business, Adobe leverages its expertise in photo editing and video editing to create highly visually appealing cloud solutions for businesses and entrepreneurs. The addressable market of this business is even bigger, estimated at around $30 billion.
Secular trends, including a shift toward visual-oriented consumption, imply that this market will only get bigger with time. Competition is mitigated by the fact that Adobe is the only relevant name in photo and video editing. Thus, Creative Cloud projects as a big growth business for a lot longer.
Last, but certainly not least, is the Experience Cloud business. This business is centered around an enterprise cloud solution that’s focused on enhancing the whole customer experience, from marketing to analytics to commerce to advertising.
The addressable market, estimated at over $70 billion, is massive. The secular consumer shift toward an experience-oriented economy defined by consumers valuing experiences over products will help this market get even bigger over time.
Competition in the space is fierce, but Adobe has a big advantage when it comes to delivering the visual aspect of an experience-driven cloud solution. Thus, Experience Cloud projects as a big growth business for a lot longer.
Altogether, Adobe is defined by three big growth cloud businesses that project to be big growers for a lot longer. So long as these businesses remain big growers, Adobe stock will remain a winner.
Bottom Line on Adobe Stock
Adobe was a big winner over the past several years. That success likely isn’t repeatable, mostly because of valuation. Back in 2013, ADBE had a price-to-sales multiple of around five. Today, that multiple stands closer to 15. Thus, valuation will limit another seven-fold increase in Adobe over the next several years.
But, that doesn’t mean the rally in Adobe is over. Quite the opposite. This rally will persist for a lot longer, despite the big valuation, because Adobe’s huge growth drivers imply that Adobe stock has enough firepower left to more than grow into it’s valuation over time.
In the big picture, Adobe is a really strong company aligned with some of the world’s most powerful secular growth trends, and the company has critical advantages which will allow to it capitalize on those trends better than peers. That is the sort of a company you want to be invested in for the long run.
As of this writing, Luke Lango was long ADBE.
