The recent fall in big tech has investors now asking if these stocks are bargains. They’re not. Certainly, Adobe Systems (NASDAQ:ADBE) isn’t. But ADBE stock may now be a safe place to keep your money until markets sound the all-clear.
ADBE stock is now down 6% on the year, while the S&P 500 is up almost the same amount. ADBE stock is priced at $469, with a market cap of $225 billion on 2020 revenue of $12.87 billion, up 15% over 2019.
The word for that is pricey. But quality costs money. Over the last five years ADBE stock has been a rare gem. It’s up nearly five-fold while revenue has doubled and 40% of that revenue has hit the net income line.
Adobe Now a Cloud Giant
What has made Adobe great is its decision a decade ago to commit to a cloud-based subscription business model. For Adobe it means revenue comes in steadily, month after month. For customers, it means software updates automatically.
Both sides of the transaction are saving money. It costs a lot less for Adobe to pay its Microsoft (NASDAQ:MSFT) Azure bill than it would to mail disks. It costs customers less to pay their Adobe bills than maintain the application.
Only recently has revenue growth begun to slow. Revenue was up 15.5% in 2020, against a gain of nearly 24% the previous year. But Adobe can maintain gross margins of 85% now, and net income grew 78% in 2020 over 2019. Adobe now has more cash in the bank than long-term debt on the books. Operating cash flow last year came to $5.7 billion.
Where to Go?
While it’s good to be the king, it’s hard for the king to find growth.
Adobe’s most recent acquisition is Workfront, a work management platform for marketers, which cost about $1.5 billion. As Adobe expands from working tools to work management, however, it is starting to find cloud competitors like Workday (NASDAQ:WDAY), Salesforce (NYSE:CRM) and ServiceNow (NYSE:NOW).
This isn’t yet hurting results, but it did hurt the outlook when Adobe reported March earnings. On the surface the numbers were outstanding, with revenue of $3.91 billion, up 26% over the previous year and ahead of the company’s own projections. But analysts didn’t raise their ratings, and the stock fell 1% on the news.
A Safety Strategy
Adobe is an expensive company but seems like a safe investment. So, its recent fall represented a great buying opportunity. Adobe shares hit a bottom at $441 and have already recouped one-third of their previous loss.
Banks like JPMorgan Chase now have price targets of nearly $600. Of 17 analysts following the stock at Tipranks, 16 have it on their buy lists, with an average price target of about $560. That’s a 19% gain from the current price.
The Bottom Line
Big cloud users like Adobe were a great way to get rich in the last decade. Now they’re a good way to stay rich.
Whether Adobe shares reach their price targets, they’re a safe place for investors to keep their money in a volatile market. The company should be able to maintain its revenue and earnings momentum.
But Adobe is no longer a bargain. Any company selling at 20x revenue like Adobe is premium merchandise. My own guess is that rotation from tech to reopening and infrastructure still has further to go. With interest rates rising, I expect many investors to keep taking profits on stocks like Adobe.
This doesn’t mean you won’t make money buying Adobe now. You may just have to time your purchase carefully and wait for your profit.
On the date of publication, Dana Blankenhorn directly owned shares in MSFT and NOW. He did not own (either directly or indirectly) any other positions in the securities mentioned in this article.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at firstname.lastname@example.org, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.