Even At All Time Highs, Adobe Shares Is Still A Buy

Sometimes as an investor, the easiest way to avoid losing money is by not fighting a trend. And a stock like Adobe (NASDAQ: ADBE), with its decade long annual growth rate of 32%, is a prime example. The $230 billion multimedia and creativity software giant has been around for a lot longer than many of its peers in Silicon Valley but it's punching with the best of them.

Their latest earnings report from the middle of June showed double-digit percentage growth in revenue that many 37 year old companies can only dream of, particularly in a post COVID landscape. EPS was comfortably in the black while at $3.13 billion, the company posted a record revenue number that was up 14% year on year. Strong growth in the digital media and creative segments underline the success the company has had with innovation. There’s no doubt that they’re the market leader in their space and are used as the benchmark when industry peers are spoken about.

This is the ideal kind of revenue, profitability and market position you want to see in a company as mature as Adobe is. They’ve been there, done that, and clearly intend to keep doing so for the foreseeable future. With around 3 weeks to go until their next earnings report, it looks like everyone on Wall Street wants a slice of the pie.

Strong Momentum

Shares are up 10% over the past week and are up more than 85% since the lows of March. A 3.5% jump to all-time highs yesterday was enough to make it one of the top performers on the S&P 500. Recent upgrades and increased price targets from JPMorgan, Cowen and Wedbush have helped cement the bull case.

Wedbush summed up the situation well a few weeks ago, Adobe “has an entrenched leadership position in the cloud digital marketing and media landscape that is unparalleled with a massive installed base showing minimal signs of churn." The seismic shift to a work-from-home economy has done wonders for Adobe’s business model and future growth prospects. A strategic partnership, announced late last month, between Adobe, Red Hat and IBM (NYSE: IBM) appears to be feeding off this premise.

As Anil Chakravarthy, Adobe’s VP of Digital Experience said, "now more than ever companies are accelerating their efforts to engage customers digitally. We are excited to partner with IBM and Red Hat to enable companies in regulated industries to meet this moment and use real-time customer data to securely deliver experiences across any digital touchpoint, at scale and compliant with regulations." As part of the partnership IBM has made Adobe its "Global Partner for Experience" and will start using Adobe’s Experience Cloud platform to transform its own global marketing.

Getting Involved

Investors getting involved at these levels have plenty to be bullish about but at the same time it’s worth noting the risks. Shares are a full 20% higher than where they were before the last earnings report and the tech market as a whole has started to look a little frothy.

Were some profit-taking and a general risk-off sentiment to creep into the market in the coming weeks we could be in for some short term volatility. This could be compounded if the numbers in Adobe’s next earnings report don’t justify the recent move while a price-to-earnings ratio of 62 is definitely on the higher side compared to the NASDAQ’s trailing twelve month average of 23.

Still that being said, any pullback from here should be viewed as a long term buying opportunity. Adobe does what they do very well and looks set to continue doing so for the long term.