While Adobe [ADBE] stock has fallen over recent weeks, it has still managed to outperform the Nasdaq 100 in this tech market-hit opening to 2022, dropping 8.19% this year, versus a 12.41% slide in the Nasdaq, as at last week’s close.
A software as a service (Saas) subscription provider of digital content creation software, the firm’s management are confident in its significant growth potential, while a decline in its price-to-earning ratio since last April offers investors enhanced value for a potentially high-performing stock in the long term.
Will a highly competitive landscape affect Adobe stock in an increasingly crowded SaaS space? And can Adobe make sustained gains in a year which could hit tech markets particularly hard?
What’s happening with Adobe stock?
The current market pullback has seen the Nasdaq fall into a correction, with many growth stocks caught up in the slide. Adobe’s stock hit an all-time high at $699.54 just over two months ago on 22 November, but since then the shares have spiralled 25.93%, closing last week at $518.16.
The shares managed to curb the recent declines last week though, climbing 5.25%, and outperforming the Nasdaq’s 2.07% rise – Adobe has the ninth biggest weighting in the tech-heavy Nasdaq index. Despite falling 16.65% over the last six months, Adobe stock is still up 12.95% on an annual basis.
Adobe is still managing to outperform its peers, as shown by our Cloud computing (SaaS) theme, which is based on the First Trust ISE Cloud Computing Index Fund [SKYY], of which Adobe is one 67 holdings with a 1.57% weighting. Our ETF performance scanner shows the theme gained 3.55% last week, but has still slipped -15.36% in the last month.
Can Adobe fight off the competition?
Adobe has managed to evolve with emerging trends through a combination of innovation and acquisitions for over 35 years, according to Business Strategy Hub, helping the company to stay ahead of competitors including Google [GOOGL], Salesforce [CRM], IBM [IBM] and Autodesk [ADSK], in an increasingly crowded SaaS market.
To help Adobe achieve its goals and fight off its competitors, few companies have the “long, established histories” of Adobe, yet “are also on the front edge of the digital transition”, reckons Motley Fool’s Jeff Santoro. He cites the fact Adobe is looking to widen its creative suite so its products can be accessed across all formats – for example the company is working on a beta version of Photoshop that would work in a web browser. And on the acquisition front, Adobe’s deal to buy cloud-based video collaboration company Frame.io in October 2021 helps it to “move higher up into the creative process”, according to Forrester analyst Nick Barber, report techcruch.com.
Adobe’s management is also confident that there’s plenty of scope to grow, calculating its total addressable market (TAM) for its creative cloud products, such as Photoshop and Illustrator, at $63bn, and $32bn for its document cloud products, such as electronic signatures, reports Santoro. Adobe’s revenue for both in 2021 was $9.6bn and $2bn respectively. And analysts’ forecasts are bullish on Adobe stock, predicting 16.6% annual returns over the next five years, which is five times that estimated for the S&P 500, reports Seeking Alpha.
Can Adobe stock make gains in a tough year for tech?
While the macroeconomic environment and talk of rising US interest rates is putting pressure on tech stocks in particular, Adobe looks to be well positioned to ride out the storm, particularly if its latest quarterly results are any barometer. Not only have Adobe’s subscribers been growing 29% annually over recent years, they are expected to grow another 50% in the next three years, while average revenue per user is also rising, reports Seeking Alpha.
Adobe's pivot to a subscription-based model looks like it’s paying dividends on the bottom line: revenue and operating income increased 23% and 37% year-on-year in Q4, while operating expenses have decreased, falling from 56% in 2019 to 51% in 2021, reports Motley Fool. Subscriptions made up 92% of overall revenue in 2021, up from 86% in 2019.
The company’s move into artificial intelligence and cloud computing - “two of the hottest markets on earth”, according to Dividend Sensei, reports Seeking Alpha - mean it has an overall TAM of some $205bn, while its current 8% market share provides evidence of the vast growth potential.
Estimated size of Adobe's total addressable market
And right now, Adobe stock is a potentially good buy at 36.5 times forward earnings and 13 times forward sales, which “while not cheap … are the lowest they've been since April 2021”, according to Santoro.
What’s next for Adobe stock?
Among 26 analysts offering 12-month price forecasts for Adobe, the median target of $656.00 represents a 26.60% increase from last week’s $518.16 close, according to CNN. And with 20 Buy, five Outperform and six Hold ratings, the current consensus among 31 investment analysts is an overwhelming Buy on Adobe stock.
There’s certainly plenty for investors to like about Adobe, a proven leader in its space with a track record of success, coupled with the huge potential for increasing its market share. According to Motley Fool’s Jeff Santoro, the current ‘discount’ in the share price “is [the] icing on the cake for anyone considering buying Adobe stock in 2022”.
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