Adobe (NASDAQ:ADBE) has been pummeled over the past month alongside the rest of the market on concerns that the rapidly spreading novel coronavirus outbreak, formally dubbed COVID-19, will cause the economy to come to a screeching halt and weigh significantly on Adobe’s day-to-day operations. ADBE stock dropped more than 25% from mid-February to early March.
But, Adobe just reported first-quarter numbers which underscored that COVID-19 isn’t having a big impact on its business… yet. Perhaps more importantly, management gave a pretty strong second-quarter guide which implied that it won’t have that big of an impact on the company anytime soon, if ever.
Reasonably so, ADBE stock soared after that earnings report.
But, shares still trade 20% off their recent highs and attractive valuation levels. So I say buy the dip. This is a long-term winner with overstated near-term pains.
A strong quarterly print underscores that the company will able to weather the coronavirus storm. Once that storm passes — and it will — this stock will roar back to new all-time highs.
Strong Quarterly Numbers
Adobe’s first-quarter earnings report was strong on two fronts.
First, it showed that the business remained on fire in the first quarter. Revenues rose 19% year-over-year, underscoring that demand for the company’s various media, enterprise document, and customer experience (CE) management solutions remains robust. Operating margins expanded 240 basis points, continuing what has been years of positive operating leverage. Earnings per share rose 33%, yet another quarter of 20%-plus profit growth.
Second — and more important — management gave a strong guide which implied that, despite COVID-19, the company would continue to excel in the second quarter. Revenues are expected to rise by 16% in the second quarter, paced by 19% Digital Media revenue growth. Margins are expected to expand. Profits are expected to rise by 28%.
In other words, despite COVID-19 bringing much of the world economy to a screeching halt, Adobe is projecting to sustain 15%-plus revenue growth and 25%-plus profit growth.
That’s impressive. And it speaks to the strong underlying demand for Adobe’s mission-critical enterprise services, as well as Adobe’s strong financial profile.
Golden Buying Opportunity
In light of Adobe’s strong quarterly report, it seems that the recent sell-off in ADBE stock is way overdone.
I’ve been saying for a while that, from the recent market sell-off, a handful of golden buying opportunities will emerge wherein investors can buy into long-term winners at discount prices.
Adobe is one of those long-term winners.
Thanks to secular rising demand for its various cloud-based services, Adobe has reported consistent 15%-plus revenue growth for the past several years. This will continue, mostly because the company is just getting started in terms of tapping into its potential in the CE management world.
Even further, a lack of viable competition in the company’s core markets has given Adobe tremendous pricing power, which has led to big gross margins and flowed through into steady 20%-plus profit growth.
Long term, then, Adobe stock is a winner, paced by what should be 20%-plus profit growth for the next several years.
In the near term, it appears Adobe is weathering the coronavirus storm quite well. A 16% revenue growth rate in the second quarter, against the backdrop of COVID-19, is pretty amazing. Nearly 30% profit growth is even more amazing.
Big picture — Adobe isn’t getting hurt that badly by COVID-19, and the company is still positioned as a long-term winner. Those two facts make the recent 20% plunge in Adobe stock look like a buying opportunity more than anything else.
Bottom Line on ADBE Stock
Adobe stock is a long-term winner that is weathering the coronavirus storm with impressive resilience. Yet, shares are down 20% from their February highs.
That’s an attractive set-up. I’m not saying Adobe stock has bottomed. I’m not saying it’s all up and up from here. Rather, I’m saying that if you fast forward three to five years, Adobe stock will be up around $500. So, if you can weather near term volatility, I think big returns await in the long run by buying the stock here.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long ADBE.
