Adobe Investment Thesis

Adobe Investment Thesis: In a world that increasingly relies on digital tools for everything from communication to building design, it stands to reason that companies leading the transition are highly successful. Technology innovators create the software that makes digital tools effective, and investors have noticed that these types of stock are likely to increase in value. 

There are dozens of tech companies, many of which bring great ideas to the table. That makes it challenging to choose the one that offers a comfortable balance between risk and reward. A long list of analysts agree that Adobe (ADBE) belongs at the top of most investors’ lists.

Here’s what you need to know to determine whether Adobe stock is a buy. 

Adobe Market Share Can Still Grow A Lot

When examining Adobe’s current performance and future potential, the first positive element that jumps out is Adobe’s market share. The company projects a total addressable market of approximately $128 billion by 2022, but Adobe’s market share was just 10 percent of that as of August 2020. 

That demonstrates two important points. First, Adobe’s market share is relatively small as compared to the estimated market size, and that market is poised for additional growth. That means Adobe has plenty of room to increase revenue over the next 12 months and beyond. 

The market can be broken down by Adobe’s three major business lines. The Creative Cloud division operates in a market segment that includes communicators, creative professionals, and those who use these tools in creative hobbies. They are expected to spend up to $31 billion by 2022.

As of August 2020, Adobe’s Creative Cloud revenues came in at $7.39 billion – a figure that doesn’t quite hit 25 percent of the total opportunity expected in 2022.  

The Document Cloud space is rising rapidly, and it is expected to increase from roughly $7.5 million today to $13 billion or more. Adobe’s Document Cloud division saw just $1.43 billion in revenue as of August 2020 – less than 11 percent of 2022’s total – which means plenty of room for growth. 

Finally, Adobe Experience Cloud is likely to become a substantial component of the company’s total revenues by 2022.

The total addressable market is projected at $84 billion, and Adobe had captured just $2.84 billion of that as of August 2020. If Adobe Experience Cloud meets or exceeds the market share performance of the company’s other two divisions, total revenues will increase significantly. 

Is Adobe Growing Revenues? 

The market share projections appear promising, but those figures are only meaningful if Adobe is able to sustain and grow its revenues. From the perspective of sustaining revenues, Adobe’s model is structured to maximize the probability of customer retention.

Nearly 90 percent of Adobe’s 2019 revenues were the result of subscription services, and that figure increased to just over 92 percent in 2020. Recurring revenue is a positive sign that the company is retaining customers. 

Adobe has proven its ability to grow revenues over the past seven years. While the company didn’t demonstrate substantial year-over-year revenue growth from 2007 – 2014, this changed significantly under the current leadership.

From 2014 to 2019, Adobe increased revenue by an average of 21.9 percent per year. Better still, it has shown positive operating and free cash flow, with an average free cash flow margin of 33.4 percent during the five-year period. 

In 2020, Adobe’s revenues came in at a total $12.87 billion, which came out to growth of 15 percent year-over-year. That is generally regarded as an impressive accomplishment given the challenges present during the COVID-19 pandemic. 

These accomplishments suggest Adobe is fully capable of capturing a notable percentage of the growing market. 

What Rate Are Adobe Earnings Growing?

Market share and increasing revenues demonstrate Adobe’s ability to attract, retain, and grow its customer base, but there is a final issue that determines whether Adobe stock is a buy. Revenue growth is of little benefit to shareholders if the company is not generating a profit. 

Of course, past performance is no guarantee of future results, but understanding whether and how Adobe’s earnings are growing is critical to the decision of whether or not to add a stock to your portfolio. 

The good news is that Adobe has grown profits most years since 2007, and every year since 2014. Specifically: 

• 2014 – $268 million
• 2015 – $630 million
• 2016 – $1.169 billion
• 2017 – $1.694 billion
• 2018 – $2.591 billion
• 2019 – $2.951 billion  

Management offered guidance for 2021, estimating Earnings per Share of (GAAP) $8.57 and (non-GAAP) $11.20.

In addition to growing earnings, Adobe has shown its commitment to delivering value to its shareholders. In 2020, the company repurchased approximately 8 million shares, which offered $3 billion in benefits to stockholders. 

Does Adobe Stock Have A Moat?

The biggest risk Adobe faces is the seemingly endless list of competitors. Dozens of companies are racing to capture a portion of this growing market.

In some cases, those competitors come in the form of massive publicly-traded software companies like Salesforce (CRM) and Dropbox (DBX).

In other cases, startups are working to capture a very narrow niche market. 

However, Adobe has something these competitors do not – experience and expertise in a complementary combination of product lines. More importantly, it has a wide economic moat that gives it a competitive advantage over those trying to break into the industry.

Where others lack the brand, Adobe is a household name. That gives it a higher degree of credibility in the minds’ of consumers than a little-known start-up. And switching costs are high from Adobe to other names, which in turn keeps recurring revenue predictable and lowers the risk of the competitive threat.

None of that guarantees Adobe’s ability to overcome challenges from qualified competitors, but it does make buying Adobe shares a smart move for investors. 

Adobe Investment Thesis Conclusion

The bottom line is that analysts have developed similar conclusions in their Adobe investment thesis: the company has strong prospects for growth in the short-term and long-term.

The addressable market is large and growing rapidly, and Adobe is capable of growing revenues alongside it. Further, Adobe’s revenues translate into earnings, which makes Adobe stock a buy. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.