Although recession concerns are affecting most tech stocks, Adobe (ADBE)’s strong business model means it is able to maintain and grow its margins through any economic cycle. With the expected recession by the end of the year, I think software giant Adobe (ADBE) could be a worthwhile buy. Continue reading.
Tech stocks have been under pressure for the past year due to the Federal Reserve’s aggressive rate hikes. After announcing its 10th 25 basis point rate hike last week, the central bank signaled there could be a pause in the tightening cycle. While this could be good news for tech stocks, one has to be cautious given the deluge of macroeconomic data due for release.
With a recession on the horizon this year, not all tech stocks are good investment opportunities. However, investors could try to buy software giant Adobe Inc.ADBE) during a recession.
In this article, I’ve discussed several reasons why it might make sense to buy the stock.
The software-as-a-service (SaaS) giant enjoys high customer loyalty due to its wide range of products and services. Due to its solid user base, ADBE is able to maintain its margins regardless of an economic cycle. In addition, the subscriber base remains intact due to high switching costs.
In the first quarter, ADBE’s earnings per share and revenue came in ahead of analyst estimates. Earnings per share came in 3.3% ahead of consensus, while revenue beat analyst estimates by 0.7%.
Dan Durn, Executive VP and CFO of ADBE, stated, “Our strong innovation engine combined with world-class operational rigor delivered profitable growth in the first quarter and sets us up for another strong fiscal year. Adobe is better positioned today than ever.” was to serve our customers worldwide.”
The company reported record sales in the first quarter. Revenue increased 13% on a currency-neutral basis compared to the prior year. Shantanu Narayen, Chairman and CEO of ADBE, said, “Adobe delivered record first quarter revenue and we are increasing our full-year targets based on the tremendous market opportunity and continued confidence in our execution.”
ADBE has updated its targets for the 2023 financial year. Digital Media Net New ARR is expected to be approximately $1.70 billion, while Non-GAAP EPS is expected to be between $15.30 and $15.60.
For the second quarter, the company expects total revenue to be between $4.75 billion and $4.78 billion. Digital Media Net New ARR is expected to be approximately $420 million, while Digital Media segment revenue is expected to be between $3.45 billion and $3.47 billion. Non-GAAP EPS is expected to be between $3.75 and $3.80.
ADBE’s stock price is up 13.9% over the past six months and 2.2% year-to-date to close the last trading session at $344.06.
The following could impact ADBE’s performance in the coming months:
Positive recent developments
On March 23, 2023, BlackBerry Limited (bb) and ADBE announced that they have partnered to provide a secure forms solution for mobile devices.
John Landwehr, ADBE vice president and chief technology officer for the public sector, stated, “The partnership between BlackBerry and Adobe improves operational processing and workforce efficiency across hiring and onboarding, procurement of goods and services, medical readiness, maintenance and logistics etc many more use cases that require signed approvals at all times and on any device.”
On February 23, 2023, ADBE announced a collaboration with Qualcomm Incorporated (QCOM) to advance its digital strategy and that of its affiliates.
Anil Chakravarthy, President of Digital Experience Business at ADBE, said, “By adopting Adobe’s enterprise applications, Qualcomm has an end-to-end solution that enhances the omnichannel experience for business customers and improves marketing performance.”
“The partnership will help Qualcomm take its own digital transformation to the next level and create new ways to showcase the transformative technologies it delivers to the world,” he added.
Robust financial data
For the first fiscal quarter ended March 31, 2023, ADBE’s total revenue increased 9.2% year over year to $4.66 billion. The companys gross profit grew 9% year over year to $4.09 billion. Non-GAAP operating income increased 6.9% year over year to $2.13 billion.
Non-GAAP net income increased 9% year over year to $1.75 billion. Additionally, non-GAAP EPS was $3.80, up 12.8% year over year.
High profitability
Based on the EBIT margin of the last 12 months, ADBE is 33.91%, 627.7% above the industry average of 4.66%. Net profit margin of 26.32% for the trailing 12 months is 909.3% above the industry average of 2.61%. Likewise, the company’s trailing-12-month return on equity of 33.86% is well above the industry average of 1.11%.
Positive analyst estimates
Analysts expect ADBE’s earnings per share for fiscal 2023 and 2024 to increase 12.3% and 13.3% year over year to $15.40 and $17.44, respectively. Revenue for fiscal years 2023 and 2024 is projected to increase 9.6% and 11.9% year over year to $19.30 billion and $21.59 billion, respectively.
ADBE earnings per share and revenue for the quarter ended May 31, 2023 are expected to increase 13% and 8.8% year over year, to $3.79 and $4.77 billion, respectively. The company has an impressive history of earnings surprises, beating consensus estimates for earnings per share in each of the last four quarters.
Solid historical growth
ADBE’s EBIT grew at a CAGR of 20.3% over the past three years. Its earnings per share have grown at a compound annual growth rate of 15.4% over the past three years. In addition, net income grew at a CAGR of 13.6% over the same period.
POWR ratings show promise
ADBE has an overall rating of B, which equates to a “buy” for our company POWR ratings System. The POWR ratings are calculated considering 118 different factors, with each factor being optimally weighted.
Our proprietary rating system also ranks each stock across eight different categories. ADBE has an “A” grade for quality, consistent with its high profitability. It also has a B for sentiment, consistent with its upbeat analyst estimates.
Within the computer program ADBE is ranked 17th out of 135 stocks in the industry. Click here to access ADBE assessments for growth, value, momentum and stability.
bottom line
ADBE reported record sales in the first quarter. Despite the uncertain macro environment, the company has raised its digital media net new ARR and EPS targets for fiscal 2023. Unlike its other tech counterparts, ADBE enjoys recurring revenue streams that not only help it maintain its margins, but grow them over time while staying isolated during a recession.
Given the company’s robust financials, favorable analyst views, solid historical growth, and strong profitability, it might make sense to buy the stock now.
How does Adobe Inc. (ADBE) compare to its competitors?
ADBE has an overall POWR rating of B. Check out these other stocks in the software and applications industry with an A (Strong Buy) or B (Buy) rating: eGain Corporation (EGAN), Commvault Systems, Inc. (CVLT) and Karooooo Ltd. (WITH).
What do you do next?
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ADBE shares traded at $343.97 per share on Tuesday afternoon, down $0.09 (-0.03%). Year-to-date, ADBE is up 2.21%, while the benchmark S&P 500 index is up 7.87% over the same period.
About the author: Malaika Alphonsus
Malaika’s passion for writing and interest in financial markets led her to pursue a career in investment research. With a degree in economics and psychology, she aims to help investors make informed investment decisions.
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