Adobe Stock Forecast [SaaS = Sticky Profits]

Adobe Stock Forecast: The transition to a digital society has profoundly impacted how people live and work. Paper-based communications are practically obsolete, and even the most critical transactions are documented and stored in a digital format.

These changes aren’t just for the dry business world. Digital technology has permeated the creative side of life, too. Traditional film cameras have been retired in favor of digital alternatives, and photo editing software offers new opportunities to enhance images and transform them into works of art.

Many illustrators work in digital media, and movie-making is now accessible to everyone through video-editing platforms. In short, these tools have touched creators and innovators of all kinds, from entrepreneurs and massive corporations to artists, illustrators, and photographers.

A long list of system and software developers have contributed to these changes, from the mythical Steve Jobs of Apple fame to the brains behind IBM, Microsoft, and Oracle. However, when it comes to the creative side of software, one company is the undisputed leader: Adobe.

New investors have watched stock prices climb in recent months, and their big question is this: does Adobe stock still have room to grow, or has it reached its peak? In other words, is Adobe stock a buy?

What Does Adobe Do?

Adobe dates back to 1982 when, true to Silicon Valley tradition, Charles Geschke and John Warnock founded the company in Warnock’s garage. They named their project Adobe after the Adobe Creek that ran behind their homes.

At first, Adobe’s only goal was to develop and market PostScript page description language, but that was enough to gain the attention of movers and shakers in the technology world. Steve Jobs was interested in PostScript right away, and his purchase of Adobe shares and PostScript licensing made Adobe the first Silicon Valley start-up to turn a profit in its first year.

Since those early steps into the digital world, Adobe has expanded, developing a suite of business tools that made paper forms completely unnecessary. It also offers a comprehensive line of creativity tools that have cornered the market among artists, designers, and illustrators.

Finally, it has changed the way consumers and businesses interact, with an end-to-end customer experience platform that allows companies to easily connect with their target audience where they spend the most time: online.

By any measure, Adobe is the world leader in creative software. Nearly every creative professional relies on Adobe tools, which include Photoshop, Adobe XD, InDesign, and Illustrator.

While it is conceivable that a competitor might develop a rival option, there is no realistic way to capture a meaningful amount of Adobe’s market share. That’s because Adobe offers all of its popular creative tools in an affordable package. Challengers would be hard-pressed to develop the same software options at the same level of quality – or better – without pricing themselves well above the standard Adobe has set.

The biggest news in the Adobe world is the company’s move from packaged software to cloud-based Software as a Service (SaaS). The transition took six years, but it was worth the effort.

Instead of a large cash outlay, consumers now access Adobe tools through a monthly subscription service.

This option has made favorites like Photoshop and Illustrator available to everyone, and Adobe has seen new subscriber rates spike.

After 2019’s fourth quarter and year end results were announced, Adobe share prices went up significantly. Does that mean it’s too late for investors to buy?

Is Adobe Stock a Buy?

By any measure, Adobe had an impressive fourth quarter, and 2019 was a banner year overall. Quarterly revenue was a record $2.99 billion, which is a 21 percent improvement year over year.

This was driven by growth in the Digital Media segment, which reported revenue of $2.08 billion. This represents year over year growth of 22 percent. Creative revenue also went up, totaling $1.74 billion, and Document Cloud revenue came in at $339 million. Fourth quarter diluted earnings per share came in at GAAP $1.74 or non-GAAP $2.29.

The most exciting numbers were achieved from Annualized Recurring Revenue (ARR) – a sign that the SaaS strategy has been well-received. Digital Media ARR increased to $8.40 billion, Creative ARR increased to $7.31 billion, and Document Cloud ARR increased to $1.09 billion.

As a result of strong numbers in the first three quarters and particularly robust fourth quarter results, Adobe reported record annual revenue for 2019 – a total of $11.17 billion. This represents a year over year increase of 24 percent. Better still, subscription bookings went up by 20 percent year over year.

Diluted earnings per share for the year came in at GAAP $6.00 and non-GAAP $7.87. GAAP total net income grew 14 percent, and non-GAAP total net income went up by 15 percent.

This news drove share prices up by nearly four percent over the 24 hours that followed, and by the time the market closed the next day, share prices were at their highest ever. Nonetheless, many analysts believe Adobe has not peaked, and there is still plenty of opportunity for those who buy now.

Perhaps this optimism comes from the 2020 projections that business leaders shared during the fourth quarter earnings call. In the next year, organic growth is projected to increase by 18 percent.

Compare that to Microsoft, which is only slightly less expensive. Microsoft is projecting organic growth of just 12 percent in 2020. That puts Adobe firmly in the buy column for anyone considering adding tech stock to their portfolio.

Adobe Stock Forecast Summary

The most important consideration in buying any tech stock is whether it can stay relevant by adapting to the changing market.

In Adobe’s case, the answer is a resounding yes. While many software companies continued to push the boxed software model, Adobe went all-in on its SaaS/cloud-based services.

This pivotal decision cemented Adobe as a critical player in the future of the digital world. Overall, that makes Adobe 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.