Adobe (NASDAQ:ADBE) really is as strong as it has been for awhile. But when you think about it it makes perfect sense that and Adobe stock is so solid.
In the stock market, amid all the numbers and stochastic price movements, it’s sometimes best to keep things simple. As such, here’s my best attempt at a simple, three box check-list for identifying winning stocks.
The company has to have winning and distinct features. The company has to be in a secular growth market. And, the stock has to trade at a reasonable valuation that leaves room for upside.
A lot of stocks check off those boxes. But, few check them off as convincingly as Adobe. Adobe has winning and distinct features (the company dominates in delivering visual-oriented digital solutions). The company is also immersed in the secular growth cloud services market. And, ADBE has consistently traded at a reasonable 30-times forward price-to-earnings multiple.
Consequently, Adobe stock has been a winning stock for a long time. Over the past five years, Adobe has risen more than 300%.
Adobe will have similar success over the next five years, largely because the stock continues to check off all the right boxes. Of recent importance, Adobe just partnered with Microsoft (NASDAQ:MSFT) in a move that only emphasizes Adobe’s winning features and expands the company’s reach in the secular growth cloud services market.
So long as these catalysts keep popping up, ADBE will remain in the winner’s column. As such, it remains the sort of stock you buy now and hold for the long haul.
Microsoft Partnership Reinforces Strong Fundamentals
Adobe stock is supported by strong big picture growth fundamentals.
Those big picture fundamentals include that this is a company unparalleled in its ability to deliver visual-oriented solutions, and that is leveraging that unique ability to create unique and highly valuable visual-focused cloud solutions.
Those solutions include Document Cloud, Creative Cloud, and Experience Cloud, and have increasing value today, in a world that is rapidly pivoting to visual-heavy consumption and interaction. As such, as this pivot continues for the foreseeable future, Adobe projects to win dollars and share in the huge growth cloud market.
This healthy big picture narrative is getting even healthier, mostly thanks to Adobe’s continued expansion into the commerce and enterprise marketing side of the cloud market.
Specifically, Adobe last year acquired two companies. The first, Magneto, is a commerce platform. The second, Marketo, is a B2B marketing engagement company. The sum of these acquisitions expanded Adobe’s reach in the cloud services market, to include commerce and B2B enterprise marketing.
Building on those acquisitions, Adobe recently announced a partnership with Microsoft that further expands Adobe’s reach in new markets. Specifically, Adobe’s customers can now tap into the Microsoft-owned LinkedIn network to more effectively identify and sell to their own customers.
This is a big move. It essentially says that Adobe isn’t done growing yet. This company started with delivering visual-oriented cloud solutions. That growth narrative is still firing on all cylinders. But, in the meantime, Adobe is expanding its business offerings through acquisitions and partnerships into things like B2B marketing and sales.
This expansion, on top of an already red hot visual-oriented growth narrative, only strengthens the long term growth fundamentals underlying Adobe.
Valuation, Technicals and Adobe Stock
Because the fundamentals remain healthy, the only two other things we need to look at here are valuation and technicals. Both of those check out.
On the valuation front, ADBE stock trades at just over 30-times forward earnings, which is roughly in-line with its five year average forward multiple. The market, too, is trading roughly in-line with its five year average forward multiple. Thus, there is no disconnect with the market or history.
Plus, growth projects to remain healthy over the next several years (20%-plus revenue growth and healthy margin expansion), and a 30 forward multiple on that strong growth profile is very reasonable.
On the technical front, Adobe’s 50-day moving average finally moved above its 200-day moving average just a few days ago. That golden cross pattern is a sign that Adobe stock is back to its winning ways after a late 2018 sell-off.
Bottom Line on ADBE Stock
In the big picture, Adobe stock is a long term winner. The company has a winning advantage (visual-oriented solutions) in a secular growth market (cloud), and the stock trades at a reasonable valuation (30-times forward earnings). A partnership with Microsoft only underscores the winning nature of this stock, and should help keep the stock on its new-found uptrend.
As of this writing, Luke Lango was long ADBE.
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