Why Adobe is My Top Stock to Buy for 2019

TL;DR

Adobe Systems was the speaker’s top stock to buy for 2019 because its recurring software subscriptions, leading creative products, and growing enterprise tools supported dependable revenue and rapid earnings growth. Adobe’s revenue was growing 20%, while earnings had grown 48% annually over five years. Read on for details about its products, recession performance, valuation, and growth expectations.

Transcript

Dylan Lewis: Alright, Brian, climbing up the risk ladder, we've got our last stock. I think this is probably for folks that have a little bit of a longer time horizon. It's a steady business, but there's a lot of growth priced into it. That's Adobe Systems, maybe a name that a lot of people interact with, but haven't quite thought about investing i... Read More

Key Insights

• "A lot of those products are basically the gold standard in the creative community." (0:50)
• "That's where it provides cloud-based marketing and analytics tools to enterprise customers." (1:13)
• "The stock fell about 65% from its 2007 high." (1:46)
• "Over the last five years, this is a business that's put up earnings growth of 48% annually." (3:54)
• "Your financial statements become much more dependable, and Wall Street generally rewards that with a more stable stock price." (5:07)

Questions & Answers

Q: Why was Adobe Systems considered a top stock to buy for 2019?

Brian Feroldi called Adobe one of his favorite stocks because it combined a dependable software business with strong growth. Its revenue was growing at a 20% rate, and its earnings were growing even faster.

Q: What products are included in Adobe Creative Cloud?

Adobe Creative Cloud includes Photoshop, Illustrator, Premiere Pro, and Acrobat. The transcript describes many of these products as the gold standard for designers, videographers, and animators.

Q: How has Adobe expanded beyond Creative Cloud?

Adobe has developed a digital experience unit that provides cloud-based marketing and analytics tools to enterprise customers. These tools help customers create and analyze marketing campaigns and increase their e-commerce presence.

Q: Why did Adobe switch to a software-as-a-service model?

Adobe moved from software licensing to subscriptions that customers pay every month. The recurring billing model makes its financial statements more dependable and reduces reliance on customers purchasing individual upgrades.

Q: How did Adobe perform during the 2007 and 2008 recession?

Adobe’s stock fell about 65% from its 2007 high. Its sales dropped 13%, and net income fell by half, but the company remained profitable.

Q: Why might Adobe perform better in another downturn?

Customers now subscribe to Adobe services instead of choosing whether to delay software upgrades. Feroldi believed this recurring revenue model would help Adobe’s financial statements hold up better than they did during the previous downturn.

Q: What was Adobe’s valuation?

Adobe traded at about 45 times trailing earnings and 25 times forward earnings. Its trailing valuation was described as not looking very different from Microsoft’s, although Adobe was less established and built out.

Q: How fast were Adobe’s revenue and earnings growing?

Adobe’s revenue was growing at a 20% rate, while earnings were growing even faster. Earnings had grown 48% annually over the previous five years, with a projected rate of 22% over the next five years.

Summary & Key Takeaways

• Adobe Systems is a $110 billion company known for its Creative Cloud software products like Photoshop and Illustrator.

• In addition to Creative Cloud, Adobe has a digital experience unit that offers marketing and analytics tools for enterprise customers.

• Despite a past downturn, Adobe's switch to a software-as-a-service model has made its financial statements more resilient, and the company has shown consistent growth.